Are you one of the half of U.S. adults who worry about running out of money in retirement? A recent report by Charles Schwab shows that 26% of all workers have saved less than $1,000 for retirement and 64% have saved less than $100,000. In fact, only 58% of Americans have any retirement account—either through their employer or an individual one.
Once Upon a Time…We Saved
In 1975, the savings rate in the United States reached an all-time high of 17% (U.S. Bureau of Economic Analysis). It plummeted to a record low of 1.9% in 2005. My, how our priorities have changed in just 30 years! In 2018, the personal saving rate was 5.7%. This means out of every $100 in after-tax income, approximately $5.70 is being saved for things like retirement and emergency expenses.
Gone are the days when people would say, If you deposited a million dollars in the bank, you could live off the interest for the rest of your life. According to GOBankingRates, in 2018, the average savings account has a measly 0.08% interest rate, and many of the nation’s biggest banks pay rates as low as 0.01%. If you’re lucky, you might find some accounts paying yields in the 1-2% range.
What Defines an Emergency?
Sometimes we think we have an “emergency” that may be disguised as a want. For example, an emergency is when your car won’t start and you need a new battery, not when the new iPhone comes out. When it comes to funding an emergency savings account, some financial gurus like Dave Ramsey will suggest having $1,000 on hand. While this is certainly a great target to start with, I would highly encourage you to save at least $2,500 as an emergency fund to put yourself in a better position to face life when it happens. Do this before you pay off any debt. Considering 66 million Americans have no money saved, and 73% have less than $1,000 in the bank, once you have accomplished this, you will be ahead of the game! Additionally, experts like Ramsey will tell you to have 3-to-6 months of living expenses saved. Establishing an emergency fund is a great goal—obviously the more you have the better. However, start first with the $2,500, and then refocus on crushing your debt.
Plan for the Unplanned
Life is what happens when you’re busy making other plans. We must account for the unpredictability of life, which makes having a savings account even more vital.
Case in Point: We recently went on our first extended vacation in about two years (thanks COVID!). Unfortunately, when we returned home we were greeted with a nice reality check when our 3-year-old refrigerator died. After spending thousands on a vacation (which we planned and budgeted for) we were now faced with the unplanned expense of a new $1,000+ fridge. These are the moments when life punches you in the gut! As my financial coach friend Stephen Newland would say, “You can’t plan for everything.”
Fortunately, we had built up enough savings to cover the cost of the new fridge, but it was still a huge hit and a total blindside. Unfortunately, most people are not in a position to pay cash for emergencies and are forced to use credit. Unforeseen events like this are a real-life example of how easy it is to get swamped with debt and how difficult it is to stay out of it.
On the other side of the coin, buying a new PS5 does not qualify as an emergency. Once again, this is where your change in mindset and behavior modification is going to come into play. Remember, misidentifying an emergency may lead to an actual emergency down the road.
I Can’t Save
In our society, we are hardwired to value earning money more than saving it. You’re probably saying to yourself, I don’t make enough money to save. If that’s true, you need to reexamine your expenses and determine what cuts to make. Here are some ideas:
- Cable — Did you know that the cost of cable has risen by 50% since 2010? Do you really need to pay $100 a month for 300 channels you never watch? Cutting your cable could easily save you $1,200 a year, or more. Explore cheaper alternatives like Netflix (basic plan $8.99 a month), Hulu (starting at $5.99/month), and a HDTV antenna (provides local channels for free).
- Gym — The majority of the people I know are non-attending fitness club members. With the average membership rate at $50 a month, you could save $600 annually by doing pushups at home and jogging at the park.
- Eating Lunch Out — If you’re used to eating out on most workdays, you may be paying $7 for a sandwich and $3 for a drink, for a total of around $10 per day. That can seem harmless enough, but it adds up quickly. That’s $50 per work week and can total $2,500 or more per year.
- Eating Dinner Out — This is a challenge for all of us. What if you went out to eat just two less times per month? At $25 a meal, that would also save you $600 a year.
- Groceries — The No. 1 rule of grocery shopping is to have a list and stick to it. Showing up with a mental list is a recipe for disaster. Figuring out a way to cut just $25 a month in groceries will save you $300 a year.
- Smoking — Quitting smoking can save you more than $2,700 a year if you smoke a $7.50 pack a day.
- Insurance — You might save $1,000 or more over a year simply by calling around and finding a cheaper car, home, or life insurance policy.
You see how all this adds up? The seven ideas listed above total $8,900 a year. Do that for five years and you’ve saved $44,500! The easiest way to earn money is to save it. Are you starting to see the big picture now?
Final Thoughts
Most experts recommend saving at least 10-15% of your income in order to be financially well-prepared for what life is going to throw at you. Of course, the more you can save, the better in the long run because your car will break down and your house will need repairs. Changing your mindset from viewing saving as a sacrifice to an opportunity is a healthy start.
The best way to save money is to stop spending it.
After you’ve written down your budget you might be pleasantly surprised at all the ways you can save money. Carefully think about each expense and determine what you can live without. The savings will add up quickly, and then you can take that extra money and use it toward debt or building your emergency fund. You can do this!
Jason is the author of Margin Matters: How to Live on a Simple Budget & Crush Debt Forever and IT IS POSSIBLE!: How I Earned Two Debt-Free Degrees and How You Can, Too.