Americans are terrible savers. No sense in beating around the bush. The average savings rate in the USA in 2015 was 5.5%. But if you break it down by income, those at the top save much more of their income where the low to middle income earners save close to nothing, according to the Bureau of Economic Analysis. But why? We all know we need to save more, and yet, we aren’t.
One reason is we live for the moment. Pop culture has taught us to spend, spend, spend, and then spend some more. Obtain instant gratification and the future be damned. Another is debt, which kind of ties into the first. The USA is the largest debtor nation in the world in terms of household debt.
Living next to the Joneses can really take its toll. A third is a false sense of security with Social Security. We were told that social security would provide for us in our golden years. Therefore, we didn’t put much thought into saving for ourselves. Also, many of us worked for companies that offered pensions. Today, most pension plans are gone and Social Security is headed towards insolvency. If you’re under 40, you’ll be lucky to get a penny, and it probably won’t be worth much as the dollar keeps losing its value. Finally, many of us are financially illiterate. Schools don’t teach personal finance, and economics seems like a foreign language. So what can we do?
Think of this as the golden rule in personal finance: Pay Yourself First.
It seems so obvious, yet most of us do the opposite and pay ourselves last. We pay everyone else then save what is left over. The problem is, many times, nothing is left over. We convince ourselves that we’ll start next month and then something else comes up. Something else always comes up. It’s human nature to procrastinate and find excuses not to do the tough or disciplined thing. It’s like going on a diet. You always end up fatter. In this case, you end up poorer. How can you ever retire? Do you want to work forever?
Paying yourself first is easy to do. We just make it harder on ourselves. Simply set up an automatic savings plan so the money is withdrawn from your paycheck before you ever see it. A good place to start is with your 401K or IRA. You get tax savings and, in the case of the 401k, receive a company match most of the time. Whatever you do, always contribute at least enough to get the company match. It’s free money. Most companies match dollar for dollar up to 5% of your salary.
You want to aim for a minimum savings rate of 10%. If you haven’t already, create a budget. You’ll not only find where your money is going, but how it is being wasted. Don’t be surprised how easy you’ll find that initial 5%. In conjunction with the budget, use what I like to call the 24 hour rule. Since I do most of my shopping on line, I let my purchase sit in the shopping cart for a day. After sleeping on it, many times I’ll discover I really didn’t want that particular item in the first place. This eliminates that binge impulse. How many times have you asked yourself “why did I buy this thing? What a waste of money.” Automatic savings also helps you take advantage of compound interest (interest earning interest) and dollar cost averaging (avoiding the pitfalls of market timing).
The psychological benefits are significant as well. First, you have the peace of mind that you’ve developed a plan to retire or will have the money available to do what you want to do when you want to do it. Second, seeing success will help keep you on track and stick with it. As with most things, early failures can cause us to give up and not even try. Finally, you’ll develop good spending habits and live within your means, not above them. It usually takes four weeks to make something a habit.
Perhaps most importantly, you put yourself first, not someone else. You are worth more than someone else, so start treating yourself that way.