Discipline and Savings; a Perfect Match!

The savings rate in this country is dismal. The most recent number (July 2018) reported by Trading Economics was 6.7%. Personal savings rate is defined as “the ratio of personal income saved to personal net disposable income during a certain period of time.” That means that the average income earner only saves $6.70 out of every $100 they earn. The rest goes to consumption.

What makes this low figure even more compelling–that our nation has a problem–is the fact that it includes retirement savings (i.e. 401(k), IRA, 403(b), etc.) accounts. Understanding and acknowledging that we, as a nation of spendaholics, have a problem, is the first step. Addressing how to fix it, is a bit more challenging. However, I have some advice that may make this exercise a lot easier than you think!

In the past, a typical budget required that you spent hours going over old bank and credit card statements, as well as receipts for all items purchased over a certain timeline. These charts and graphs may have helped to identify where and what you purchased, and allowed you to categorize them in some order that related to your family. This is laborious and frustrating. Besides, who wants to spend their rainy Saturday doing this? Hold fast, there’s a new way!

Step 1

The first thing you need to do is set your savings to be automatic. Your company retirement plan at work is one of the easiest ways to set this up. Your goal will be to save the maximum allowed under your company’s retirement plan. If they offer a 401(k) plan, you can save $18,500/year, if under age 50, or $24,500/year if over age 50. If the maximum amount removes too much needed home income (more on that later), then at least strive for 10% of your gross paycheck to be contributed.

After your automatic retirement contribution is set up, the next step is to link a savings account (preferably one that pays a decent interest rate) to your checking account where your paycheck is deposited. You will then set up an transfer of 5-10 percent of your net paycheck from your checking account to automatically transfer to this savings account. The timing of this transfer should be set up so it happens on the same day your paycheck arrives (i.e. every other Friday, or the 1st and 15th).

Step 2

Now that you’ve made savings automatic, you are free to spend as much of your remaining income as you want. But first, you should separate your purchases into one-of-two categories: 1) Wants, and 2) Needs.

Needs are, well, needs. You don’t need a BMW, you need a car. You don’t need a steak dinner, you need food. Got it? Wants make up everything else. You want to upgrade your cell phone; you don’t need to. I think we can all relate to our insatiable human demand for wants. This list is a great way to check off all your needsbefore’ you begin purchasing your wants.

Step 3

The third component should be obvious, but you can only afford to spend what you make. Mortgages, car payments, and college debts aside, you should really not accrue debt from purchasing more than you can afford on a monthly basis.

Credit card debt can destroy even the most carefully designed financial plan. The accumulation (and carrying of) credit card debt is the first sign that you have a spending problem. If you are spending more than you’re making, go back to your needs list and make sure they are all really needs, as it is easy for wants to make their way onto your needs list.

Congratulations!!

If you follow these three steps, you should be well on your way to financial solvency. You’ll feel good about building a retirement account that will play a critical role in funding  part of your retirement. You’ll also be able to spend everything left in your bank account knowing that you already paid yourself.

Arktos Wealth Management has software reserved for out best clients to help them track their accounts, spending patterns, assets, and liabilities held with, or outside of, our firm. If you are interested in engaging in these services that can benefit you and your family, let us know. We are on a mission to help our clients live a financially stress-free lifestyle.