As memories of last decade’s Great Recession fade away, Americans seem to have turned their backs on saving once again.
The U.S. savings rate is plummeting
New numbers from the Commerce Department released on October 30 show that the U.S. savings rate in September fell to 3.1%. That’s down from 3.6% in August.
And it’s way down from an 11% high in 2012, when Americans saved like nobody’s business. Back then, saving was seen as a knee-jerk reaction to the turmoil that seized the country during the financial meltdown.
Yet while the Recession-era mindset of saving money hung around for a little while, it’s now almost officially gone; 3.1% represents the lowest savings rate since just before the Great Recession in 2007.
Some pundits argue that a declining savings rate signals growing confidence in the economy. Their rationale is that people are pulling money out from the mattress and putting it into the stock market, which is at record highs.
That could perhaps be true and would — taken in tandem with low interest rates — help to explain the epic tear that most major market indices are on.
But failing to save money is never really a good thing.
Here’s how to build a savings habit in your life
Money expert Clark Howard has one goal in everything he does: To help you keep more of what you make!
If you’re somebody who maybe has never really been about saving because it confused you, or maybe it just seemed like there was never enough money to save, the good news is it’s actually really easy to change that mindset around and get started on a better financial path.
Start with one penny!
The trick is to have a small amount of money taken out of your paycheck to get your feet wet. Then you have to gradually build up your personal savings rate over time with baby steps.
If you have a 401(k) at work, try starting with a savings rate of just 1%. That’s just one penny out of every dollar that you put aside for savings and investment in your future. And because it comes out as pre-tax money, it reduces your taxable income by 1%.
Talk about a win-win, right?!?
Use target-date retirement funds
If you’re uncomfortable with the idea of investing, most 401(k) plans have something called a target-date retirement fund. With a fund like this, you simply select the year you expect to retire, set it and then sit back and forget it. The fund’s manager allocates the money for you.
So let’s say you expect to retire in 2035. Then you buy a 2035 portfolio and the fund manager picks a mix of stocks and bonds to get you the best returns with the lowest overall risk.
When you’re younger, they have you heavily invested in stocks to achieve growth. Then as you age, you get less and less stocks and more bonds to preserve the capital you’ve built up over a working lifetime.
Bump up contributions on a set schedule
Remember the thing about starting with one penny? That’s just the beginning. The real formula for savings success is to have you bump up that contribution rate.
Every six months, you should aim to bump up your contribution by one more penny. In five years, you’re saving 10% and you’ll change your future.
At the very least, you always want to make sure you’re picking up the company match on any 401(k). If you don’t, you’re leaving free money on the table!
No access to a 401(k) through work? No worries!
You can employ the same savings strategy with a Roth IRA that you start yourself.
One note here: Roth IRA contributions are made with after-tax dollars, so you won’t reduce your taxable income today like you would with a 401(k).
However, after-tax money contributed to a Roth IRA will never be taxed again — unlike the money in your 401(k) which gets taxed in retirement.
Go cash only
Many times, it’s hard to start saving when you’re spending too much money because of the plastic in your life. If that describes your situation, go to a strictly cash lifestyle — you shouldn’t even use a debit card! Real paper money could be the solution for you.
Using the envelope method is one of the most popular ways to do this. On payday, take out your money and that’s what you live on until next payday.
You can get fancy by earmarking one envelope for groceries, another for your rent or mortgage, a third for a car payment, a fourth for utilities, a fifth for credit card debt and so on.
As one envelope thins out, you may have to juggle the funds around to another envelope to make it through until the next paycheck.
But at least you won’t be spending money you don’t have any more!