If your car suddenly breaks down, you’ll need money. If you get sick and rack up some costly medical bills, you’ll need money. If you get laid off from your job, you’ll need money.
You want freedom? You want security? You want peace of mind?
You need savings.
Here’s the reality: you need to save money.
Seven out of every ten Americans have less than $1,000 saved up. One in three have nothing stashed away.
Society has conditioned us to spend. We tell ourselves we need things we’ll hardly even want in a month’s time. We spend our paychecks when we should be saving for the future. Some of us don’t even have funds to save for the future.
Without savings, you could wind up in long-term debt or worse—and that’s not a position you ever want to be in.
But it’s a position many Americans find themselves in today.
Lack of Knowledge = Lack of Savings
There’s a reason a majority of Americans don’t have enough savings. It’s not only that they don’t have money to save or that they’re careless with their cash.
It’s because they didn’t—and likely still don’t—understand how to save money. The result? A long-term lack of savings that keeps millions from living the lives they deserve.
To save smart, you need to understand what you’re up against . . .
What is Inflation?
Inflation is a major obstacle in your quest to save money.
If saving money is like rolling a giant boulder up a hill, inflation is what makes the hill steeper and steeper as you push.
Over time, inflation causes the value of the dollar to decrease. This makes goods and products more expensive.
In 2000, the median home value was $119,600. In 2017, it was just under $200,000. The same goes for consumer goods—a gallon of milk was $2.79 in 2000. By 2017, had risen 13% to $3.16.
Now think about inflation in terms of your income. If you made $100,000 in the year 2000 and still make $100,000 today, that money wouldn’t get you as far whether you’re buying houses, buying milk or buying anything in between. That’s inflation at work—and it’s critical to understand and account for this when you start saving.
Right now, the inflation rate is about 2%. In one year, what you’re buying will likely cost about 2% more. If your savings isn’t growing by more than 2%, then, you’re actually losing money. Think about it. Let’s say your household spends about $60,000 per year on total expenses—everything from maintenance to groceries to gas to clothing…
So what should you do?
Define Your Savings Needs
You understand the looming threat of inflation, but how do you combat it? If you understand how to find money to save and how to save it right, you’ll be able to build a solid financial foundation. That way you’ll always have cash when you need it.
First, answer these questions:
What are your immediate needs?
What are your long-term needs?
You need to know what you’re saving for in order to set up a framework for saving effectively and efficiently. Consider these 3 savings scenarios to determine what’s right for you.
Savings Scenario 1: Saving for Emergencies
Threats of sickness, injury, and job loss are unpleasant but very real. If you get into an accident that lands you in the hospital for a few weeks or get laid off due to budget cuts, what are you going to do?
Fall back on your emergency fund.
Should you ever get sick, hurt, or lose a job, these funds will ensure that you can keep up with essential living expenses while you get better or find another job.
Your emergency fund should cover all of your household expenses for at least 30 to 60 days. Over time, that fund should be able to cover three to six months of living expenses.
These funds should be accessible, not tied up in any long-term investments. They are for true emergencies—big car repairs, medical bills, unemployment.
To structure your emergency fund savings, it’s essential to first . . .
- Understand how much you need to live. What are the bills you need to pay? What do you need in terms of living expenses? Groceries? Yes. Mortgage payment? Definitely. Taco Tuesdays? No mas.
- Break your necessary expenses down into bite-sized savings goals. Say your monthly expenses are $3,000. Save $100 every week for the next six or seven months—or $50 every week for a year. Maybe you have a tax return, commission payment, or gift from a relative coming in. Add it to your emergency fund.
Month to month, it might not seem like a lot—but it adds up. Saving just $50 a week can leave you with $2,400 by the end of the year. Keep that up for 5 years and you’ve got over $12,000 saved up.
You should also look for options besides a traditional savings account. These accounts tend to deliver low returns with any earnings lost to inflation. The average savings account interest rate is around 0.06%. Leave your money in these low-performing accounts and you’ll never be able to keep pace with inflation.
Savings Scenario 2: Saving for Retirement (Passive Investing)
Whether it’s by choice or not, you’re going to stop working someday. When that time comes, you’ll need solid retirement savings in place.
Gone are the days of Social Security covering retirement living expenses. Same goes for pensions. While pensions were the norm in the 1980s and even 1990s, just 5% of new hires are offered a traditional defined benefit plan now.
What does this mean for you?
You need to save for retirement. And if you are saving, you need to take a hard look at your accounts and your returns to ensure they’re delivering against inflation.
Savings accounts are only paying out pennies per year—and that copper isn’t going to help you in your golden years. If you’re generating less than 2% in annual returns, you’re losing money.
So, what are the alternatives to parking your money in a savings account?
Invest in Precious Metals
When it comes to saving for retirement, many people opt to invest their money in resources. Tangible investments like precious metals have a track record of reliable growth. Gold, for example, has increased in value by 315% in the last 15 years.
Even during extreme market swings, precious metals remain steady investments. Between February 2007 and February 2008—the peak of the Recession—precious metal funds were up 42.90%.
Save in America’s Best 401(k)
If you’re a salaried employee, there’s a good chance you have a 401(k) or 403(b) in place. These popular retirement savings accounts enable both employees and employers to invest funds over time—funds that can be withdrawn when that employee is 59 ½.
While these accounts are straightforward, too many investors rely solely on them for their retirement savings. This is a mistake.
Yes, you’ll probably make some money over time—but there are a number of fees that chip away at your net earnings. In some cases, you could lose close to one-third of your savings just to these unnecessary administrative costs.
America’s Best 401(k) is your alternative. These unique plans charge employees 0.65% or less of their balance. The fees are also more transparent. Every fund has a clear-cut fee associated and each is “lined-itemed” so there’s never any confusion. This helps investors make smarter financial decisions over time.
Because ABKs aren’t pulling fees from funds, they’re more likely to choose well-performing, low-cost funds. This creates greater return for future retirees.
Contribute to IRAs & Roth IRAs
Roth IRA & Traditional IRA accounts enable savers to put aside money for retirement—money that grows tax-free over time. They’re often used in addition to or in lieu of 401(k) accounts.
If neither you nor your spouse has a set retirement plan through work, traditional IRA contributions are tax deductible. You can also deduct IRA contributions if your household income falls below predetermined limits—in 2018 the threshold was a modified adjusted gross income of $189,000 or less for married couples filing jointly.
Roth IRAs don’t offer the same deduction potential, but earnings and withdrawals are usually tax-free.
Invest in Stock Index Funds
While many would-be savers are apprehensive about investing in the stock market, stock index funds cut through the clutter and help investors reap some benefits without hassle or headaches.
That’s because these pre-established funds are low fee and low risk. They’re anchored by investments with long-standing histories of solid performance.
By investing in these funds, you’re diversifying your savings—meaning you don’t run the risk of a single company or industry going under and taking your retirement savings with it.
That said, these are funds. Not stock. You won’t experience the same daily fluctuations or epic increases that draw many investors to the stock market. These funds deliver over time so, if you can park your money and hang tight, you’ll be well positioned for significant growth in your retirement savings.
Savings Scenario 3: Saving to Invest (Active Investing)
If you’re considering starting your own business or investing in a new launch, you need short-term cash flow and added income to invest in your venture.
Investing in real estate—even if you’re a novice—or tapping into a whole life insurance plan could be just the savings tools you need to get the cash you need.
Start Investing in Real Estate
Even if you’ve never invested, there are plenty of ways to use your existing savings for high-return real estate investments.
Many developers and real estate investment businesses welcome passive investors who can contribute as little as $1,000 to upcoming development projects. In exchange for the investment, participants get a fixed return—usually 8 to 15%. Depending on the project, you could see returns in 6 to 12 months.
If you’ve got the knowledge and resources to be a more active real estate investor, flipping or wholesaling real estate properties can deliver quick paydays. This can help you pull together the cash you need to invest in that new business venture.
Pay Monthly Premiums for Whole Life Insurance
You’re likely familiar with “term” life insurance. Term life insurance is very common. Participants pay a monthly premium for 10 to 20 years and, should they die during that period, their beneficiaries are paid a set amount. Term life insurance can pay hundreds of thousands, but you won’t see a cent of it.
Unlike term life insurance, whole life insurance also acts as an investment vehicle. From year one, whole life insurance policies accumulate a cash value, which can be withdrawn at any point, penalty-free. While it’s more expensive than term life, you’ll make your premium payments back and then some, plus have solid life insurance coverage for life.
It’s a one-two punch—you’ll be safeguarding your family while accumulating cash to invest in your business or other desired entrepreneurial pursuits.
Finding the Money to Save . . .
Now you have some savings strategies. But what cash are you going to save?
If you don’t have enough extra income at the end of each month to put towards saving, commit to reviewing your budget at least quarterly and identify places you could cut costs or eliminate them entirely.
If you can’t think of anything to cut, here are some common spots where would-be savers can trim their spending fat:
Cut the Cost of Meals
The average American household spends more than $3,000 per year dining out.
Even if you don’t cancel all of your out-of-home meals, see if you can slash that number by 30 to 50%. Accomplish this and you’ll have $1,000 or more to save.
Another big money eater? Lunch.
Many people—especially millennials—prefer to buy lunch instead of brown-bagging it. If you spend $10 per day on lunch, you’re tossing $2,500 or more down the drain each year.
Pack lunch. Eat better. Save money. It’s a no-brainer.
Bring Your Own Coffee
It’s easy to overlook $2 here and $5 there in the name of your caffeine fix. If you’re buying two cups of coffee at the office each day, you’re probably spending $25 to $60 per week—upwards of $1,250 per year.
Do yourself a favor and start packing your coffee. If you have the option, get it from the break room.
The cash you spend on coffee could easily transform into your emergency fund or give a major boost to your retirement savings.
Change Your TV Service
It’s not uncommon to spend over $100 on cable every month. But with Smart TVs and devices like the Amazon Fire Stick and Roku, you can pay for the content you want when you want it.
Apps and digital subscriptions like Hulu, HBO, DirectTV, and Netflix can give you the shows and channels you want for a fraction of what you’d pay for cable. Save $50 per month here and you’re looking at a good amount in your savings by year’s end.
Review Your Cell Phone Bill
Review your current invoice from your cellular provider and see if you can lower your cell phone bill. You may not be using all of your data or you may be paying a high premium for insurance on an old phone. A quick glance could turn up a few ways to save.
After you’ve scoured your bill, reach out to your phone carrier and see what they can do for you. With so much competition in the market, providers are clinging to their customers. They’ll probably be willing to offer you a deal to keep your contract.
Even a modest reduction—$20 to $40 per month—adds up over time.
Get Rid of Insurance You Don’t Need
We’ve been conditioned to believe we need insurance so that we keep paying. Break the cycle and you could easily save hundreds or even thousands per year.
Like your cell phone bill, don’t be afraid to dig into your insurance policies. You’re probably paying insurance you don’t need that won’t save you money in the long-term.
A good example? Dental insurance. You should take care of your pearly whites, but there are plenty of ways to work outside the system. Hit up dental schools or clinics for free. Get a dental payment plan. Often what you’ll spend in a single year even with a cleaning or two is a fraction of what a premium dental plan costs.
Together, these simple cuts can easily add up to $5,000 to $8,000 or more—in a single year. That’s the perfect jumping-off point for your savings.
Whether it’s saving for an emergency fund, retirement, or investments, setting aside cash empowers you in a BIG way. It opens endless doors to endless possibilities.
The best part is that it’s your money. This puts you in the driver’s seat—that’s something you can’t say about loans or credit cards. When it’s your savings, you call the shots.
You decide what.
You decide how.
You decide when.
And that’s powerful.
Kayla is WealthFit’s Associate Editor. She previously worked with Teach For America and is driven by her belief in an equal and excellent financial education for all people.