Discover the Financial Principles of the Bible

Refocusing on Savings

Over 7 million job lost, rising unemployment rate, plunging stock market values – while most of the headlines over the past two years have focused on the negative impacts of this current recession, there have also been some positive impacts as well.

One of those positive outcomes has been that Americans are spending less and saving more. In fact, many economists are concerned that we may never return to the levels of consumer spending that we saw just a few years ago. However, I am not nearly as optimistic. America is a nation of consumers and it’s not likely that even the worst recession since the Great Depression will change our spending habits for long. However, it seems that at least in the short term we have shifted our focus from spending to saving.

The average personal savings rate has climbed from 1% at the beginning of 2008 to its current level of slightly more than 3%. That’s certainly an improvement on the negative savings rate that we saw in 2005, when the average American was spending more than they earned. However, that’s still a far cry from the recommended 10-20% savings rates.

Unfortunately, the lack of strong savings habits has further compounded the negative effects of the current recession. Over the past two years, many of the individuals who have lost their jobs or have seen their incomes reduced had minimal savings to fall back on. The failure to save a sufficient portion of their income during the years of prosperity has come back to haunt them as they try to survive this recession.

I believe that the words of Solomon, while uttered 3,000 years ago, are still relevant today, “there is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up.” Proverbs 21:20.

So how much of your income should you be saving?

The traditional rule of thumb is to save at least 10% of your income. Obviously this will vary based on many factors, but it’s important to establish a pattern of savings while you are young and then as your income increases you can save even more.

Simply saving whatever is left over at the end of each month is never a good idea, because typically nothing is. A better way to save is to have a certain amount or percentage of your paycheck automatically deposited into a savings account on a regular basis. This way you won’t have to make a decision whether or not to save money each month, because it’s already being done for you.

In order to benefit from a regular savings program, it’s good to have a savings strategy.

Emergency Fund
The first step should be to create an emergency fund for the unplanned, true emergencies that you may encounter. This would typically be $1,000 – $2,000 set aside in a savings account that you can easily get to.

Cash Stash
No matter how much you plan and prepare, there are always expenses that arrive that you didn’t account for. These may not be true emergency items that you would tap your emergency fund for, but they are still expenses that you can’t ignore. Having cash in a savings account that you can draw on will allow you to handle these expenses without incurring the ridiculous interest rates that come from using credit cards.

Safety Net
The third step will be to build out a savings nest that would allow you to survive for 6-9 months in case of a job loss or other major catastrophe. Just a couple of years ago, it seemed like unemployment was a non-issue with the official unemployment rate at 4.4%. Now the unemployment rate has spiked to 10.2% and it’s taking an average of 6 ½ months for unemployed workers to find a new job. If this recession has taught us anything it’s that the prudent man should be prepared.

Retirement Fund
The fourth step in your saving plan should be to invest for your future. Almost everyone has dreams of retirement, but simply relying on Social Security probably won’t allow you to live the lifestyle that you envisioned. While very few companies offer pensions any more, many do offer 401k plans that you can take advantage of. Many of these plans offer company matches on the amount that you contribute. A typical plan includes a 50% company match up to a certain contribution level. This allows you to instantly earn a 50% return on your investment while increasing the total percentage of your income being saved.

In addition to taking advantage of your company’s 401k plan, you should also consider further savings options. Setting up an individual retirement account (IRA) allows you to have greater control over your investment options and further increases your savings rate.

These are simply some of the basics to help you develop an effective savings plan. From here, you could set up further savings options for a vacation fund, college fund, Christmas fund, etc. While many people will soon return to their free spending ways and neglect their savings, the wise individuals will learn from the experiences of this recession and will be better prepared for the next one.

Filed in: Family Finance, Stewardship

One Response to “Refocusing on Savings”

  1. December 21, 2009 at 11:06 am #

    Did it take much time to research this article? It’s really well written, nice job on it for sure.