Simply stated, most people don’t put enough aside for savings. Whether it’s retirement savings, rainy day funds, or growing a nest egg towards making an investment or big purchase, most folks simply don’t tuck away any money. And by any money, I mean any . . . according to the Federal Reserve Board, upwards of 31 percent of Americans have no retirement savings. 19 percent of those people with no savings are quickly approaching retirement age, between the ages of 55 to 64 according to CNN Money. For people who do not currently own their home, Social Security isn’t tethered to rent prices and depending on your market, you may have a difficult time keeping up. Other social safety net programs are evermore under the knife in our current political environment. Having individual savings very well could be the difference between retiring comfortably and being forced to keep working well into your golden years.
Don’t think this is just a crisis for older folks or one that can be put off though! Young people are not generating the type of savings they need to make major investments, whether they be in stocks and bonds or real estate. From an investment standpoint, this is a really dangerous trend. Current rates of price inflation are higher than the return on most savings accounts, meaning if you have some money tucked away in a low-yield savings (or a coffee can on your fridge) in time it will begin to lose value. Simultaneously, rent prices are going through the roof–payments made for housing that have no long term investment value.
Especially for people with lower incomes, lagging savings can have deep and tumultuous consequences. A health crisis or broken down car can lead to a cycle of debt, either in the form of credit cards or small high interest loans, that at best extracts wealth from your bottom line and at worst throws you hopelessly into a feedback cycle of interest.
All of this is to say, no matter who you are: grow savings. I understand how difficult that can seem, especially if your current pay is hardly covering your cost of living. But developing a cushion, even a small one, will protect you from hitting the floor hard. And smartly using savings once you have grown a little nest egg means making your money make more money for you.
Well, where to start then?
How much to save? Of course, what you save depends on your means and your ambitions. “Some” is a great start. For people who currently have no financial safety net, putting aside 10 percent of your weekly income will quickly give you at least a little cushioning, but even tucking $25 a week into a savings account will start to accumulate quickly. Once you catch a rhythm and understand how much you can feasibly save, consider putting money aside when you get paid rather than holding onto the leftovers of a paycheck. If you get windfall cash from an unexpected place, like a tax return or paying part time gig, throw that into savings before you spend it. Paying down high interest debt is also a great way to get a leg up on savings–the money you save paying interest is money you can store.
Where to save. When you first start, save anywhere. Tucking money aside into a savings account rather than keeping it in your checking will make it less likely that you end up just spending it. Once you have some accumulation, consider putting some of your savings into investment vehicles that will make it grow in value: 401K funds, IRAs, bonds. More about this later.
Rainy day. How much should you save in your rainy day fund? The most common recommendation NerdWallet cites is between three months and a year of your basic living expenses. This varies from individual to individual, of course. Making sure you have enough to not be surprised by an unexpected job loss or hospital bill is really what it comes down to.
401K. Among the most popular retirement funds, 401Ks are a popular way for many businesses to help workers grow their savings. Many companies have funds set so that money can be taken directly from payroll checks and deposited into a 401K, meaning after a matter of weeks you hardly notice the money is gone. Some even match your contribution, meaning whatever you put into your fund is doubled by the company as an incentive for saving. If this is available where you work, take full advantage of it . . . and put aside as much percentage wise as your company will match, if not more.
IRA. Much like a 401K, IRA and Roth IRA funds are designed to help you put aside money for your retirement. If you don’t have an employer-managed retirement fund, IRAs are a good option that give you considerable leeway with how you want your fund managed and invested. Look deep into whether a Roth or traditional IRA is better for your tax situation and don’t be afraid to ask a professional at the investment firm for help.
Stocks and bonds. Once your savings are looking pretty sweet and you’re consistent about adding money to your retirement funds, you can consider investing in stocks and bonds. Choosing the right portfolio for your needs requires a good amount of thought and research, but as a rule balanced is where you want to be. A solid combination of stocks, managed to your degree of risk, with offsetting bonds–when stocks are down, bonds often go up and vice versa–will take your savings and help them make more money. Be sure to have a good understanding of the fees different managers and investment firms charge before you dive in. Picking your own stocks is something you can do as well, but it can be more stressful and risky than just finding a fund with a good track record and history of year-over-year growth.