Homework Assignment: Saving for Your Future
Even if you are not getting a child (or yourself!) ready to start the new school year, you may still think of September as a time for new beginnings. This year, make it a time to consider a new or improved savings strategy.
We have all been taught that it is important to save money. However, according to one study, Americans put aside money at less than one-half the rate of Europeans, and less than one-third the rate of the Japanese. This financial "habit" can be particularly damaging when it comes to retirement, since Social Security benefits provide the average retired worker with only 40% of pre-retirement income. So, whether or not "real" school starts this month, here are two homework questions to ponder: (1) Are you comfortable with your current savings habits? (2) Do you have a financial plan that includes savings goals? Here are a few ideas to get you started.
Hey, where did all my money go?
You may say that your budget is squeezed so tight that saving is simply unrealistic. While it is true that many situations just do not allow for putting aside an "ideal" percentage of your income, it is surprising how small changes (and small change!) can add up.
One idea: For three months, record every dollar you spend. You will begin to notice patterns that you had not realized--and will probably be surprised. Then, identify the things you can live without. For instance, if you just cut out that gourmet coffee and pastry every workday morning (at perhaps $5 a day), you could save over $1,200 in the next year alone. If you put this sum each year in a savings account earning only about 1% interest annually, in 20 years, you will have accumulated more than $25,000. Now think...is that latte really worth it?
Smart credit card use
When it comes to credit cards, compound interest can work against you. If you carry a balance from month to month, you will be paying interest on your interest. Even if your current financial situation does not allow you to pay off your balance each month, you can take some steps to improve your financial health over time.
1. Shop around for the lowest rate you can find (but be careful of temporarily low "teaser" rates), and transfer balances from higher-rate accounts.
2. Talk to your credit card company. Especially if your payment record is good, they may lower your interest rate or eliminate fees.
3. If you have multiple credit cards, pay off your highest interest credit card first.
Emergency fund
Many financial professionals recommend that you keep savings equal to at least three to six months of basic living expenses in an easily accessible, low-risk account like a savings account. While this may be a long-term goal, you should at least have specific established amount in mind as your target
Setting goals
Once you have eliminated unnecessary expenses, made a plan to pay off your credit card debt, and started your emergency fund, then what? Your dreams may include the purchase of a home, sending children to college, retiring comfortably...or all these and more. Have you assigned a dollar amount to each of these goals? Do you have a sense of how long it will take to achieve your goals, taking into account tax rates as well as investment rates and risk?
Take a step now
Everyone begins the financial planning process from a different point. You may have an existing savings program but do not know how to make those savings work and grow to reach your goals. You may be having difficulty in establishing or prioritizing financial goals. Or, you may feel that your budget does not allow for much planning (but remember that latte!). Regardless of your current situation, the time to set savings goals and take action is now. Please call us to discuss how we can help you in your financial planning process. Working on your financial plan is one homework assignment you should not skip.
Annual "check-ups" are best
In an effort to increase public awareness of the importance of savings and the fact that Social Security alone is not enough for a comfortable retirement, the U.S. Social Security Administration and the American Savings Education Council launched a campaign earlier this year to educate Americans about the need for saving and planning. The Save for Your Future campaign recommends that every American take four steps each year to improve his or her long-term financial health:
1. Calculate how much money you need for retirement and other personal and family needs. Plan how to accumulate money and other assets to help you meet your needs.
2. Act to implement your plan and save the money you (and your family) need.
3. Reassess your financial needs and the progress of your plan every year. If your needs have changed or your plan is not working, readjust one or both of them.
4. Perform these steps each year after reviewing your annual Social Security statement.
For more information on saving for your future go to: www.saveforyourfuture.org
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- This article is excerpted from the CPA Bulletin that is prepared monthly by the staff of the AICPA for the clients of its members. This article does not have any official authority and the information therein should not be acted upon without professional advice. Copyright ã 2001, American Institute of Certified Public Accountants, Inc., Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881
- ã 2001 David J. Driscoll & Company