NEW YORK (TheStreet) -- Are you saving enough money?
This week is America Saves Week, and since it is also tax season, this is the perfect time for anyone to assess their savings plan and consider their financial goals.
At this point, some readers will have a cynical reaction, pointing out that on a macro basis, incomes for the middle class are declining when compared to earnings for the upper crust, the middle class is shrinking, homes are becoming unaffordable, etc.
But if you get caught up in all the bad news, you skirt the question and it's a very important question for you to answer, for yourself.
Not everyone is suffering from economic problems in the same way, and many people at all income levels can save more money if they carefully consider their long-term goals and their monthly expenses.
The little things add up. Do you go out to lunch every day? If so, try recording this spending for one week and then for a month. Doing this may be enough to encourage you to begin bringing lunch from home, which not only saves oodles of money, it can improve your health.
Here at TheStreet, a major focus is helping readers find investment vehicles to consider, however, chances are that you are not saving as much as you could, and you may be focusing much more on picking stocks than you are on figuring out how to adjust your own budget in order to grow your savings.
Maybe you're already maximizing your savings. But you surely know someone who is not. Maybe you can spread the word. At americasavesweek.org, there's a very simple and useful section called "Assess Your Savings Knowledge." All the tool does is ask key questions; most apply to people of all income levels. Here are a few:
Do you have at least $500 of emergency savings to pay for unexpected expenses? This question ties into a problem affecting many people, who fall into various short-term financial traps, including relying on payday loans repeatedly. Once the cycle starts, it's very difficult to stop.
Again, you may roll your eyes at this point and point out that so many people are struggling. Indeed they are. But some people may be making monthly or daily expenditures that keep them from building up any savings at all.
Do you save a portion of tax refunds, gifts, bonuses, or other financial windfalls? That tax refund could quickly be spent on buying something new, but do you really need whatever you are considering buying? The chunk of cash coming in could jumpstart your savings, or could be used to pay down debt. If you use it to pay down debt, consider this -- will you have to do this again next year? Why? Is there any way you can make changes now so that your next tax refund or other windfall can be saved?
Do you save enough for retirement? Of course, very few people do, but one thing everyone needs to consider is that Social Security is meant to supplement retirement income. It is very difficult for most people to live off of Social Security.
Do you save for retirement at work? Many larger employers offer 401k or 403b retirement plans, with the employer matching the employees' contribution up to a similar limit. If your employer offers this type of plan, you might think there's no way you can afford to participate.
A 401k or 403b plan is a tax deferred retirement plan. This means any money you put into your retirement account now will not be taxed. The contribution will be deducted from your taxable income. Later in life when you begin withdrawing from the retirement account, you will pay taxes on what you withdraw, possibly at a lower tax rate than you are paying now.
Why is this a great thing? For starters, your tax bill goes down. Then, if your money is in stock mutual funds, assuming the market does well over the long term, your investments grow on a tax free basis. And here's the beautiful thing: Let's say your employer matches your contribution up to 3%. That means if you put 3% of your salary into the account, your employer puts in another 3%. Yes, a 100% return on your investment during the first year. Not bad.
"But putting 3% (or whatever amount) into my 401K plan is like taking a pay cut!" Yes, it is. However, you can start small. Maybe increase your contribution by 1% a year, until you hit the limit. Those increases may not be very painful, especially since they are "before tax" contributions and since the increases will happen over such a long period.
The current limit for annual 401k contributions is 17,000, but the limit rises to 23,000 if you are 50 or older.
Your 401k, 403b or other tax-deferred retirement account may wind up making up the bulk of your next-egg when it becomes time to retire.
If your employer does not have a retirement plan, you can start your own, with an IRA account at a bank, a mutual fund company, or with a broker. Speak to a financial professional and find out what your options are. If you open an IRA at a bank and the money goes into a CD account, you won't earn much with interest rates so low. Mutual funds may be the best way to go.
Do you build equity in your home? This has been a traditional way to build wealth over time, but of course it's just one piece of the puzzle. If you are renting, you cannot build up equity. But maybe you can save up enough to put together a down payment and purchase a home. Will it be worth it? Possibly, but you can't even make that decision until you save up a down payment. Then you will need to look at loan options and figure out whether or not it makes sense financially to buy.
Do you expect to pay off all mortgage loans before retirement? "You'll always have a house payment and you'll always have a car payment." A veteran banker once said this to me. But it doesn't have to be that way.
If and when you are ready to buy a home, don't limit yourself to considering a 30-year mortgage loan. A 15-year loan will have a lower interest rate, and you will build up equity much faster. Depending on the scenario, you may find that you can afford the 15-year loan, with the end result being huge savings on interest, as well as gaining piece of mind by paying off the loan so much earlier. An example of this, comparing 30-year and 15-year fixed-rate loans at last week's national average interest rates is included in Buying a Home? Now May Be the Best Time.
One more question not included in the "Assess Your Savings Knowledge" tool is this: When was the last time you assessed your monthly bills? Maybe some of them can be cut. Take a look at your cable or satellite TV package. Call the provider. Is there a cheaper package available? Could you "live" without access to the channels you would use. Are you spending much more time watching NetFliX (NFLX) - Get ReportNFLX than you are spending watching content provided by cable or satellite? Food for thought, and possible money in your pocket. Or in your savings account.
What are you financial goals? Do you think you can never "get ahead" enough to plan your financial future?
"You have to be a saver." This is what a former manager of mine said to me during a discussion on personal finance long ago. He was right. It doesn't matter how much you earn. You simply must put away a certain amount of cash every time you are paid or you will never be able to plan ahead. Try it. It will reduce your stress.
"Phil, why are you driving a minivan, when you don't even have any kids?" An employee of mine said this to me long ago. This employee was driving a very nice SUV, with a total cost exceeding the employee's annual wages. The employee just couldn't understand why I would want to be seen driving a minivan. My answer was that my wife and I were saving money to buy a home and weren't going to let anything stand in our way, including the expense of buying less nerdy vehicles.
I ran into many customers when working at a community bank who were spending considerably more on two car loans each month, than they were on their mortgage payments or rent.
This is something to consider carefully. How often do you buy a new car? Why? They no longer fall apart in three years as they did back in the '70s and '80s. You might have a car that's seven years old and hasn't ever had any major repairs. Or maybe it is time for the first major repair. Is this a reason to buy a new one now?
Are you buying a new car because you want to be seen in a lovely new vehicle? This makes sense if you are in sales, and have to impress clients all the time. But if you don't need the new car for that reason, consider how the new purchase affects your family. Does your need to "be cool" absorb money that might be better spent on funding your child's education?
Getting back to goals -- many people who are retired rely in part on pension income. That's going away, for the most part, for succeeding generations. You had better fund a retirement account over time, or you will face a major decline in your standard of living later on.
What's a good retirement goal? Many articles on retirement planning focus on "not outliving your money," and suggest that when you reach retirement age you can spend a certain percentage of your savings each year. But that's a rather dicey approach. Maybe a better goal is to put together a sufficient retirement nest egg that you can live off the income generated by the nest egg.
This way, your savings won't run out.
Speaking with a certified financial planner might be very helpful, because the planner can help you to factor in every part of your financial life, in order to come up with reasonable goals and methods for attaining them.
But the only way to even think of making use of the available tools to reach your goals is to save money on a regular basis, by putting it into a savings account, making regular contributions to a retirement account at work, or, even better, both.
-- Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.