Unfortunately, many Americans do not have extra funds to handle a financial hardship if one were to arise. In a recent survey conducted by Bankrate.com, almost half of Americans confessed they don’t have any emergency savings set aside to cover three months of expenses. Within that number, more than a quarter (28%) have no emergency savings at all. At the other extreme, almost half of the people polled have over three months in emergency savings. The foundation of this great savings breakdown may be simple: Many people just don’t know how to save.
Why are so many Americans behind on savings? One of the big reasons people aren’t saving more is likely because they are living beyond their means. In addition, the increased use of credit cards and the popularity of payment options such as Apple Pay and Samsung Pay, have made it easier to spend than to save.
Here are six tips to pursue a stress-free financial future.
- Create a Budget — Track your expenses, figure out how much you need to cover essentials, and identify where you can make cuts. For example, by not eating out as frequently, you might be able to save $30 or more a week.
- Prioritize Your Savings — With your budget in place, calculate how much is left for savings and set priorities. Consider the following:
- Stockpile an emergency fund that covers bills for at least six months. Better yet, have two to three years’ worth of cash or short-term investments.
- Make regular retirement fund contributions. Be sure to take advantage of an employer’s matching contributions—otherwise, you're missing an opportunity for additional retirement funds.
- Save for your kids’ college tuition.
- Sock away money for a vacation, entertainment, and other splurges.
- Make Savings a Habit — Pay yourself first with every paycheck by contributing to your savings account. The easiest way to do so is through automatic deductions.
- Capitalize on Compounded Interest — Albert Einstein called it the “eighth wonder of the world.” Put your money in accounts paying interest, leave it there, and watch your interest potentially grow. Look at this example. If a 20-year-old saves $30 each week, that adds up to $1,560 a year. With a 1.04% annual return, that one year in savings will grow to $2,485 by the time they’re 65. If they continue to make annual contributions of $1,560 for the next 45 years, they would have the potential for a grand total of $92,351, minus fees and other investment-related charges. Keep in mind that results will vary. The hypothetical rate of return used here isn’t guaranteed, and the example isn’t representative of a specific situation. And remember, all investing involves risk, including the potential loss of principal.
- Pay off Credit Card Debt Every Month — Paying high-interest rates on your balance is money you could otherwise be investing.
- Save Your Raise — As painful as it may seem, one way late starters can play catch-up is to put most of that extra money into savings. Unless you have been struggling to live on your current pay, pretend that the bonus or raise you received doesn't exist. Instead, add it to your savings. If you don't have an adequate emergency fund saved, correct that by taking your bonus or raise and put it in your savings.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
LPL Financial representatives offer access to trust services through The Private Trust Company, N.A., an affiliate of LPL Financial.
This material has been prepared by LPL Financial, a registered investment advisor, member FINRA/SIPC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.
Raymond Mark, CFP® is a Vice President LPL Financial Advisor at Elements Financial Wealth Management. In his role, Raymond's works to assist clients in their goal of financial stability by working toward improving their investment returns, while keeping within their goals and risk profile. He has been in the financial industry for the last eight years and a has been with Elements since May 2009. Raymond and his wife Kimberly live together in Fishers with their daughter Lia. Raymond graduated from Purdue University. His favorite things to do outside of work are CrossFit, golf and spending time with family and friends.