Kick-Start the Savings Habit

“As important as I think (saving) is, national savings has always been relegated to the B list of economic measures.”
 Edward M. Gramlich, Board of Governors of the Federal Reserve from 1997 – 2005

Believe it or not, there was a time not long ago when Americans tracked their savings instead of their credit card debt! Now saving money seems like a thing of the past. Americans set aside money, and yet it goes straight into mutual funds, often by way of 401(k)s and other qualified retirement accounts, where it is no longer liquid, guaranteed, or under their control.

These days, we are so eager to run that we forget to walk first! We neglect to save in order to “invest,” when BOTH are necessary. After all, saving money provides the crucial foundation that allows us to then invest successfully. 

Table Of Contents:

• How Credit Overtook Savings
• Personal Savings: A Foundation of Prosperity
• Time to Start Saving!
• 8 Tips to Jump-Start Your Savings
• Where to Save? 

In Pound Foolish by Helaine Olen, the director of Vanguard Center of Research, Steve Utkus, points out that before the rise of the financial planning industry in the 1970s, the cornerstones of personal finance were “savings accounts, whole life insurance, and the home mortgage.” At the time, most people’s number one fear was public speaking, not illiquidity.

However, personal savings peaked in 1975, when the average household socked away 14% of their earnings. That’s a stark contrast compared to 2019 Bureau of Labor and Statistics data. While the average household made $78,635 annually or $67,241 after taxes, they only had $6,017 left for savings or less than 10% of the average household income. Hence, objective plans are important. 

How Credit Overtook Savings 

For years, credit drove the economy. However, it came at a steep price. Consumers grew complacent with easy credit terms and financing their purchases. According to Jonas Emmerraji, a contributor to Investopedia and Entrepreneur Magazine, “As the credit market seized, and consumer credit lines began to shrivel, people started to realize that the credit limits on their accounts weren’t the same as cash in the bank.” 

By 2008, the trapdoor of credit caught the whole country off-guard as the economy crashed, foreclosures soared, and many found themselves unemployed and/or insolvent. If a family did manage to create a diverse retirement portfolio, they may have tapped into their savings to help their adult children. The 2020 pandemic was another curveball. Job layoffs, an economic shutdown, and a volatile stock market made savings difficult for many. Or, families may have withdrawn money to cover business expenses during Covid closures and stay-at-home orders.

An additional concern in 2021 is how we view credit. Banks have lucrative offers that are often misleading. While purchases with points can help secure discounts for hotels, flights, gas, and groceries, credit cards are still a form of debt. A sudden illness or job loss can cause a person to quickly fall behind on payments. And, with double-digit interest rates, credit cards aren’t a risk you should take. 

Hence, a more proactive approach is saving. Despite the challenges, kick-starting your savings with a proven strategy can uplift and empower you. What’s more, you’ll shift from a scarcity mindset to Prosperity. 

Personal Savings: A Foundation of Prosperity

An active and consistent savings strategy is KEY to economic health. It provides short- and long-term benefits, such as:

1. Having a robust emergency fund available. 

Relying on credit increases debt, while withdrawing from a 401k account in an emergency comes with stiff penalties and taxes. The bottom line is that cash is a necessity. Ample cash reserves allow us to weather emergencies without falling into the debt dependency trap (credit cards).

2. Having liquidity for opportunities. 

We often save money “in case of an emergency.” However, we should also save “in case of opportunities”! While credit cards have lucrative cash-back offers, when you factor in the interest rate, membership fee, and late fees if you fall behind, you start to realize that benefit is really a liability. 

With savings habits and personal finance, your personal saving objectives are better when you seek a expert advice. Typical advice is to put money in the stock market, and yet, there are many other investment opportunities. The key is having the liquidity to choose what you want.

3. Weathering economic downturns. 

Cash reserves are essential if (or when) the bottom falls out of the financial markets. Economic cycles can still present challenges…however, those with cash can weather the storms much more easily.

4. Saving money triggers an upward spiral towards financial certainty.

According to a 2013 article in Forbes, there are four top factors in upward mobility: education, dual incomes, continuous income generation, and savings. A household that is in the habit of setting aside cash will have more money for education and training. Better training leads to a better career or business opportunities. A higher income is achieved, and more money is available for savings. It’s a pattern that builds upon itself exponentially!

5. Save more money, save the economy.

When people save rather than depending on credit, the economy has greater stability. It is not affected by ebbs and flows with interest rates, market volatility, or spending that will halt suddenly if credit standards tighten up. Economies fueled by credit are susceptible to instability and economic “bubbles” that eventually pop.

Time to Start Saving!

“Saving money is something we can control. It may not be easy…but saving money is possible.”
— Kim D. H. Butler

Americans spend most of their extra money on vacations, their pets, alcohol, coffee, and eating out. Hence, it’s a natural tendency to spend more as we earn more, as we discussed in “LifeStyle Inflation: Taming the Habits that Escalate Spending.” This approach doesn’t move us ahead as much as put us in a perpetual holding pattern, running ever faster to keep up with demand and from backsliding into poverty. And, that’s why saving is crucial.

Saving is a progressive action rather than a defensive one. It asserts self-discipline to shift from subsistence living to comfort. 

In Busting the Retirement Lies, we recommend setting aside up to 20% of your earnings for long-term savings. It requires a lot of sacrifices and cutting back on luxuries. And yet, growing that reserve at the 20% level will progress towards comfort* then onto prosperity while creating a cushion that will help break any financial fall.

What’s more, living within your means is a time-honored concept—in the long run, it pays off… literally!

8 Tips to Jump-Start Your Savings

1. Track what you’re spending now. 

Once you know where your money is going, you can determine where you can afford to adjust your spending. Because all those daily mocha lattes add up and so do entertaining clients, download apps like Mint, PocketGuard, or You Need a Budget (YNAB) to keep track of your finances. 

2. Lower your spending. 

Are you spending more on entertainment than saving for your financial freedom? Do you really need 900 cable channels? Look at your bank statement and bills to review where you can lower costs (late fees, excess fees, hidden charges). Carpool to work or move closer to your job. Pay for your vehicle instead of leasing it. 

3. Increase your cash flow. 

Rent out your vehicle for an extra $350 to $1,750 a month on sites like Turo. Partner with a property manager and buy homes to rent out in neighborhoods with the highest rental rates. Adding smart features and upgrades can also increase your monthly rent rolls. Ask your insurer for home and auto discounts (age, no claims, policy duration, bundled plans). Comparison shop and always use coupons, discounts, and rebates (Shop Savvy, BuyVia, ScanLife, Honey). 

4. Focus on changing habits, not deprivation. 

Add home-cooked meals and bag your lunches (instead of eating out). Switch to a cable alternative like a Roku or Apple streaming device for Netflix instead of dropping $60 on a theatre and snacks for two, or spending $200 a month on cable.

5. Make saving automatic. 

Set up automatic withdrawals to remove the temptation of having extra money sitting in your checking account. And, ensure your bank offers the highest interest rate as local banks aren’t always the best option. Some online banks offer competitive rates as they don’t have to pay for physical locations and can pass the savings on to customers. Orange Bank used to have the highest APY. However, SmartyPig by Sallie Mae currently offers 0.70%, followed by Affirm (0.65%) and Fitness Bank (0.65%).

6. Out of sight, out of mind. 

Consider opening a savings account at a separate bank or credit union, or beginning a cash value insurance policy so that you have liquidity without making access to your cash too easy. If you treat this account as an expense, you’re less likely to see it as money you can use anytime you want.

7. Pay yourself first and strategize accordingly. 

Set long- and short-term savings plans. And, reward yourself for saving money. The more you find discounts and ways to increase your savings, the more confident you’ll feel financially. Remember, retirement savings includes your savings, paying less, and also stressing less. Eat healthy, exercise regularly, and live an active lifestyle. That way you can enjoy your golden years (however you want!).

8. Create continuous income streams. 

Passive income can include writing books, affiliate or network marketing, and investing in real estate. Other ideas include flea markets, surveys, and royalties on books, song lyrics, or products.

Where to Save? 

Savings accounts at a bank or credit union are a good place to start. As your liquidity grows, we don’t recommend keeping 6 or 12 months of living expenses in a bank because of low interest rates and also privacy issues, taxation, and other issues. And as this article on “Bank (In)Security” on ProsperityPeaks.com affirms, banks may not be as safe as we think!

Interest rates for bank savings accounts range from 0.01% annual percentage yield (APY) and up In February, the national average was 0.04% (FDIC data). Hence, FDIC-insured online banks are better. Even so, it’s a measly 1% or less! 

Find out why the wealthy often utilize high cash value whole life insurance, and how it can help you

• increase long-term savings and financial stability
• shield your privacy (the IRS won’t know what you have stashed away)
• protect your family permanently (why get only term insurance that becomes cost-prohibitive when you need it most?)
• beat bank rates (cash value rates of return are around 2.75 to 3% by year 10 and 4.5 to 5% by year 20, depending on your age and health), and
• build liquidity that can be used or borrowed against for any reason.

Despite those who argue that the rate of return is nominal, whole life insurance offers more bang for your buck. Take a 45-year-old man who wants to retire at age 65, and let’s say he puts $35,000 annually into his policy. While his cash value rate of return (ROR) is -22.56% in Year 1 at age 46, by age 65, it increases to 4.68%. He’ll also end up with more cash over the years. The death benefit on that same policy increases from $1,053,632 in Year 1 to $2,868,081. What’s more, the cash value can be used anytime as a loan or for an emergency. Hence, it’s about the absolute value that you can extract over time. 

For more information, contact Partners for Prosperity to get an illustration on how a whole life policy might perform for you, and whether or not it would make sense in your situation.

Typically you’ll want the ability to be able to save for more than ten years to achieve returns that “beat the banks.” However, the ability to put permanent life insurance benefits in place can also be a strong deciding factor! Life insurance is more than just a savings vehicle.