When we look back at our savings habits, we see two different tales going on. From 1949 to 1984, our savings rates averaged 11.1% per year, and in no one of those years did we save per household less than 9%. We step after 1984, and we see a totally different story. Since then, we have never been over 9%. Shockingly, in 2005, our average savings rate was only 2.6%. In the summer of 2008 before the Financial Crisis, we were at nearly zero on our savings rate. In 2009, we bumped back up to 6.1%, because that’s what happens when we get scared. We’re nervous about our jobs; we’re concerned about the economy, and suddenly we start saving more.
Right now, we see an average rate of about 4.5%, but I have to correct that because just this morning we got the latest numbers. We are only saving 3.8%. Now, that’s sort of a good news/bad news, because when we save less, we’re feeling more confident with the economy. But, of course, I have great concerns as a financial advisor that we’re not saving enough.
The question is: How much do you need to save? When it comes to your retirement, we know based on research you need to save 16.6% every year for 30 years—that includes your employer match—in order to replace that income in retirement. We also, in the meantime, have emergencies. We tell people to try to save 3 to 6 months’ income to have in an emergency cash account. That’s pretty hard to do, but that amount of money will keep you out of the credit card ditch.
How do you get started? Make it a habit. Start small. Aim for $1,000 in your emergency cash savings account, and then build up to $5,000. Use a bank draft so that it gets out of your hot hands before you can spend it. If you happen to have access to a credit union at work, have them deduct money to go out of your paycheck to go into the credit union account, and build that up.
Sign up for that 401(k). If you’re lucky enough to get a raise, split your raise with your pocket and your 401(k). Then, just increase contributions 1% a year. You will never notice it.
Back to those tax refunds, don’t spend the lagniappe! If you get a little tax refund, or if you get inheritance along the way or a bonus, split that extra money in half. Spend half of it and enjoy it, but save half of it.
Do your best to avoid dipping into savings. Never ever borrow from your 401(k). That’s a terrible thing to do. And if you have that emergency cash fund, use it for emergencies. Don’t use it for regular expenses. It should only be used for those big, unusual items.