How many households have the right outlook to build wealth?
Why do some households save more than others?
Building household savings may depend not only on cash flow, but also on
psychology. With the right outlook, saving becomes a commitment. With a less
positive outlook, it becomes a task – and tasks and chores are often postponed.
Financially
speaking, saving is winning. Sometimes that lesson is lost, however. To some
people, saving feels like losing – “losing” money that could be spent. So
assert Ellen Rogin and Lisa Kueng,
authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into
Reality. They cite a perceptual difference. If people are asked if they can
save 20% of their income, the answer may be a resounding “no” – but if they are
asked if they can live on 80% of their income, that may seem reasonable.1
There may be a gap between perception & behavior.
Since 2001, Gallup has asked Americans a poll question: “Thinking about money
for a moment, are you the type of person who more enjoys spending money or more
enjoys saving money?”2
While more respondents
have chosen “saving money” over “spending money” in every year the poll has
been conducted, the difference in the responses never exceeded 5% from 2001-06.
It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of
respondents indicated they preferred to save instead of spend, with only 34% of
respondents preferring spending.2
So are we a nation of good savers? Not to
the degree that these poll results might suggest. The most recently available
Commerce Department data (January 2015) shows the average personal savings rate
at 5.5% - a percentage point higher than two years ago, but subpar
historically. During the 1970s, the personal savings rate averaged 11.8%; in
the 1990s, it averaged 6.7%.2,3
What
reminders or actions might help people save more? Automated retirement plan
contributions can assist the growth of savings, and are a means of paying
oneself first. There is the envelope system, wherein a household divides its
paycheck into figurative (or literal) envelopes, assigning X dollars per month
to different packets representing
different budget categories. When the envelopes are empty, you can spend
no more. The psychology is never to empty the envelopes,
of course – leaving a little aside each month that can be saved. Households
take an incremental approach: they start by saving one or two cents of every
dollar they make, then gradually increase that percentage, household expenses
permitting.
Frugality may
help as well. A decision to live on 70% or 80% of household income frees up
some dollars for saving. Another route to building a nest egg is to invest (or
at least save) the accumulated consumer savings you realize at the mall, the
supermarket, the recycling center – even pocket change amassed over time.
How many
households budget like businesses? Perhaps more should. A business owner,
manager, or executive
may realize savings through this approach. Take it line item by line item:
spending $20 less each week at the supermarket translates to $1,040 saved
annually.
Working
with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan
participation from Natixis Global Asset Management had a couple of details
affirming this. While employees who chose to go without input from a financial
professional contributed an average of 7.8% of their incomes to their
retirement plan accounts, employees who sought such input contributed an
average of 9.5%. The study also learned that 74% of the employees who had
turned to financial professionals understood how much money their accounts
needed to amass for retirement, compared to 54% of employees not seeking such
help.4
Saving
money should make anyone feel great. It means effectively “paying yourself” or at
least building up cash on hand. A household with a save-first financial
approach may find itself making progress toward near-term and long-term money
goals.
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates.
This information has been derived from sources believed to be accurate. Please
note - investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
professional services. If assistance is needed, the reader is advised to engage
the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
Citations.
1 - businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]
2 - gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx
[4/21/14]
3 - bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]
4 - bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html
[9/6/14]