Money Matters: Pumping Up Your Savings
Today marks the start of "America Saves Week," an educational campaign being waged by more than 1,000 corporate, government, and nonprofit organizations nationwide to get Americans to save more for their future.
The drive couldn't have come at a better time. The federal government reported this month that the nation's personal savings rate fell to negative 1 percent last year. In other words, for every $100 in disposable income workers enjoyed in 2006, they spent about $101.
This marks the lowest household savings rate since the Great Depression. Yet more and more workers today are faced with the sobering reality of having to rely on savings, not traditional pensions, to fund retirement.
To be sure, many financial experts question the accuracy of the government's savings-rate statistic. It doesn't capture the true value of Americans' pretax retirement savings or their investment income, which are two huge sources of wealth.
Nevertheless, most studies clearly show that Americans need to do a much better job of saving for their own future. Consider: About 2 out of 5 workers have saved less than $10,000 toward their retirement, according to an Employee Benefit Research Institute study. And the vast majority of workers have saved less than $50,000.
Yet studies have shown that households may need to set aside at least $200,000 simply to cover healthcare expenses in retirement.
Part of this savings shortfall may stem from a lack of financial education. For instance, a surprising 61 percent of workers assume they'll have some pension income to live on during retirement. Yet only around 40 percent of households are covered by a traditional guaranteed pension. And that figure continues to drop each year.
For some households, their poor savings rate simply reflects financial constraints. An American Payroll Association survey found that nearly two thirds of U.S. households live paycheck to paycheck–needing each subsequent check just to stay current.
But a good deal of the blame also lies with inertia. It's difficult for workers without a history of saving to get going without the proper motivation. Unfortunately, "just as you've got to walk before you run, you've got to save before you can invest for your future," says Richard Rosso, a financial planner with Charles Schwab in Houston.
So what are the first steps all households should consider?
At the very least, start an emergency fund. According to Bankrate.com, only 40 percent of Americans maintain enough savings to cover three months' worth of expenses. Financial planners, though, say that's the minimum you should keep on hand for unexpected expenses, ranging from healthcare emergencies to job loss.
Take care of your debts. You can't climb out of a financial hole until you stop digging. Yet 51 percent of Americans, according to a Bankrate poll, say they don't worry about paying their credit-card bills each and every month.
Budget your spending. You won't know how much more you can save each month unless you take a full accounting of where all your money is going. A simple way to budget is to keep pen and paper handy wherever you go and simply jot down everything you spend money on. Do so for three months, and then calculate how much you're spending on average each month on everything from your monthly mortgage to the daily cup of coffee.
Remember that even small amounts of savings count. Think saving an extra $25 a week won't matter? Think again. The Consumer Federation of America offers this telling example. Say you were to set aside $25 a week, every week, for the next 40 years. If your money earns just 5 percent a year, you'd have $166,020 saved up by retirement. Now, if you found a way to save $50 a week and invested that for the next four decades, you'd have $332,020 amassed (at the same rate of return).
Bank your raises. Rosso calls this the 2 percent rule. Anytime you get a raise–even a cost of living adjustment–try to increase your savings rate by 2 percentage points. For instance, if you're currently saving 5 percent of your salary every year and you get a raise, think about boosting your savings rate to 7 percent. By doing so, you will substantially increase the long-term potential for your nest egg. And you probably won't feel much pain because most of the savings will come out of your raise.
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