Even now, I sometimes ponder, if I have the extra cash, what good is it doing by sitting in my bank account? And apparently not many actually like saving money, according to a recent study that found about half of Americans are saving less than 5% of their annual income for the long-term.
While many Americans might not be too fond of saving, there’s a good reason why you should. Below are a few tips from financial experts who have varying approaches to how you can break the nasty habit of spending additional cash as soon as you get paid.
Why should I save?
If you can pay all your bills and have a little extra spending money, why should it matter if you don’t put some of it into savings? You have no large purchases in your future anyway, right?
The simple answer is, you should always keep a financial cushion for unexpected emergencies. You can never plan ahead for these surprises, and when one actually occurs, it shouldn’t send you into a financial crisis or financial instability.
Just a few of these unpredictable emergencies include injuries or sickness, losing your job, car accidents, among many others.
According to Steve Repak, financial literacy speaker, “Most emergencies can be taken care of with $1,500. Before you save for anything else, make sure you have a fully-funded emergency account [which is] not comingled with your retirement accounts or accounts you pay bills from.”
But not everyone agrees that there’s a “magic number” you should save to be in the clear.
Obviously, no dollar amount or percentage can define the threshold of financial stability, because the amount each person can save ranges depending on expenses, bills and income. However, there are some common money saving tips you can follow to help achieve your financial goals.
Long term vs. short term
Ed Snyder, Certified Financial Planner, says, “Financial stability in the short term is having at least three months’ living expenses saved. Financial stability for the long term is having enough money to live during retirement without the money running out.”
Snyder says financial stability for the long term can be determined by multiplying your annual living expenses by 22 to find out the amount of money you need when you retire. For example, if your expenses add up to $80,000 per year, then $80,000 X 22 = $1,760,000. You’ll need about $1,760,000 when you retire if you want to continue a lifestyle with the same annual expenditure. The actual percent you would need to save each year depends on how many years you have left until retirement.
However, if that annual percentage you are saving is small because you’re far from retirement, there are also ways you can utilize additional money for your financial benefit.
Paying off debts are just as important
Repak advises in paying off credit card debt. Since credit cards normally have high interest rates, paying off debt is just as important as saving extra cash. Repak says, “You will have more money if you’re earning interest instead of paying interest to someone else.”
President of Integrity Insurance, Toby Bloom, says the amount also depends on your tax bracket and inflation. “Bear in mind that you factor in the cost of inflation. Your money won’t be worth as much later on as it is today.”
Saving smaller amounts for a longer period of time when you’re younger may eventually pay off in the future.
The bottom line
Finally, Ilene Davis, Certified Financial Planner, says the best answer to this question is “It depends.”
“It depends on how many years you want that income to support you. It depends on your spending needs, not necessarily your income. It depends on the rate of return you expect your money to earn, and how much you expect the cost of living to increase. It depends on how much of your spending needs will be funded by pensions or social security, and how secure those potential benefits might be.”
While saving money now doesn’t have immediate payoffs, it’s always a wise plan. Whether it’s $5 or $500, saving something is always better than nothing and sooner is always better than later.
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