This series of six articles is intended to help you navigate and put into practice basic financial information that will help you make sound decisions that provide a higher assurance of financial security than you otherwise could have counted on IF you accept—AND adopt—fundamental principles and rules that will require the development of your own self-discipline to make these recommendations secondary habits over time. These articles could also become the basis for a syllabus in a high school finance course that could be offered in our public schools.
- SAVE: We will examine the discipline of saving, not from the standpoint of absolute dollars or percentages of your paycheck but in terms of an attitude toward saving that inclines you to save as much as possible, while ignoring the formulaic approaches that either don’t always work or are impossible to accomplish given the cash flow you currently generate. More than one in four Americans (28 percent) have savings below $1,000. Rising living costs are the primary barrier to saving more (66 percent), followed by debt repayment (31 percent).
According to Zacks Investment Research, the average U.S. savings account contains a meager $5,923. That is probably less than a quarter of a calendar year in terms of cash needs, and woefully short of any unforeseen emergencies that might arise. Why is this abysmally small amount all that gets saved? The primary reason given is that a person claims they cannot afford to save more. But if your monthly compensation was suddenly cut by 10 percent, you would scramble to figure out what to cut back on rather than become homeless. The fact is that people CAN save more; they just don’t want to and cannot truly comprehend the danger of not saving more.
How much should you be saving? As much as you possibly can—until it hurts. If you’re stopping by Starbuck’s almost every day, eating at restaurants tow to three times per week, and buying hot dogs, popcorn, and soft drinks at the movies, you are robbing your necessity, your future nest egg—your savings. There is no formula, as mentioned in the prior part of this series. Make saving a challenging project, the success of which depends upon maximizing the amount by finding spending cuts and denying yourself the little luxuries you know you really do not need and can do without just fine. Self-denial is only hard until it becomes a secondary habit, think of it as a form of mental exercise and personal commitment.
Okay. So enough about how much. Suffice to say it is never enough; so just get going, you are never too young to start. Where to save? A savings account tied to your checking account? That may be a good beginning point but you cannot leave your money in this pot that pays you very little (after taking into consideration inflation). Your bank will put it to work and make money from your savings. They just are not inclined to let any of that increase trickle down to you.
So, instead, open a money market account that today pays over 5 percent per year. A money market account is a relatively safe investment. Higher returns mean you will take on increased risk that could in turn lead to losing some of your principal savings because of higher volatility that goes along with higher risk investments. Here is free advice from someone with an MBA, a CPA, decades of executive financial experience, and mixed success in his own personal portfolio (we learn from our mistakes). Open a trading account, either at your bank or a brokerage, and begin to trade. Scary right? Not at all. I recommend Robinhood. Trades are free, it is easy to navigate, and the links are intuitive.
You are going to be moving your savings from the bank electronically to your new account that has been set up to trade and invest. The least-expensive investments you should examine in your new trading account are passive funds called ETFs (exchange-traded funds); these are suggested for their low, competitive fee structure. You can browse these online, but my recommendation is to forego trying to guess segments that will be doing well in the future, segments such as a particular country or region, or an industry, technology, consumer goods, or anything else. You simply don’t know what the future holds in terms of investing. Neither does anyone else for that matter.
Your savings can go into a stock index fund tied to the entire world. It may make 4–8 percent per year on average, but only during global recessions will it fare poorly and that will be a temporary downturn and setback. Tying back to the first part of this series,
LEARN, re-read the short paragraph that profiles each ETF and then look at the fund’s historical performance. You will have fun, and you will learn a lot as you watch your savings and investments grow over time. If you get started now, you will be surprised and delighted as you watch it grow over the next five to 10 years.
Here is a fun financial fact: A saved amount that generates a return of 5 percent per year will double in total in just 14.4 years. Similarly (called the Rule of 72), at 8 percent per year, your savings and investments double every nine years.
Once again, defend yourself. Before reading the next part in this series, take these recommendations, and put a “why” in front of them to search the Internet to more fully understand the importance of each of these.
Or contact me at www.linkedin.com/in/roddyrmann.
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