Imagine you learn about an investment that offers great returns with acceptable risk. The numbers look fantastic! You’ll have no problem reaching any of your long-term goals with this investment. It’s perfect.
There’s just one problem: You don’t have any money to invest.
See, even in the best financial plan, a “perfect” investment only works if there’s money to invest. I know this point sounds obvious, but in the U.S., we’re facing a savings problem, and without savings, it makes the investing part kind of difficult.
In a recent survey by Bankrate, they found 66 million people have no money saved. You might think this issue is limited to people only earning minimum wage or in other serious financial situations. But “even for households earning more than $75,000, almost one in four can stay above water for no more than three months.”
In the chart below, you’ll see that the savings rate, which peaked during the 1970s, has dropped steadily since then. Today, the current rate is around 5.7 percent. That means for every $100 of after-tax income, we’re saving only $5.70. It’s not enough if we want to achieve our financial goals.
For many investors, the focus in financial planning can be on finding so-called, “perfect” investments. First, the perfect investment is one that fits your values and goals. And second, as I noted earlier, even perfect investments require money to generate returns.
It leads me to ask, have we spent as much time thinking about our savings as we do our investing? Would we be better off as investors if we thought a little bit more about how much we save each month versus the return we earn each quarter?
To be clear, I’m not saying that investment performance doesn’t matter as part of our financial planning. Instead, I’m suggesting that this one element — how much we save — is something very much within our control. It’s also something that, over time, will play a big role in our ability to make the kind of long-term investments that will lead to financial security.
What is the right number? Many experts suggest a savings rate of 10-15 percent. But depending on where you’re at in life, that number may not be right for you. Few 20-somethings can swing that much AND pay back college loans. Then, when you’ve retired, you’re probably no longer receiving an income, so you’re not so much saving money as spending it wisely.
For instance, you may be in a position before you have kids to save way more than 15 percent. Take that opportunity, because after you do have kids, additional expenses could mean you can’t save as much. Ultimately, the right number fits your financial plan and moves you closer to the things you’ve said matter most to you. The fact remains that every dollar you can save now is one more dollar you don’t have to worry about earning in the future.