By Stephen Fournier, President, Central New York Market, KeyBank
When it comes to money, people think in terms of numbers—and how and what.
How much do I earn? How much debt to I carry? What is my credit score? How much do I have saved for retirement? What is my savings rate?
These are great questions. The answers provide a measure of your financial wellness. However, what numbers do not provide is your capacity to become fiscally fit.
For example, let’s consider your personal savings rate. The average personal savings rate is around five percent. Compared to where we were a decade ago, this is a marked improvement. But it remains below the 10 to 15 percent many financial experts recommend.
The ability to save is important because it is the foundation to financial wellness. It requires that you spend less than you earn, manage your debt, and have a commitment to invest in your future.
So why do so many American struggle to save? Especially because statistics show most people want to be in control of their finances?
Simply, the ability to save is as much about actions and behaviors as it is about numbers. For most the immediate reward—using money to buy something that brings gratification today—trumps saving for tomorrow.
Another barrier is that for many the idea of saving money is overwhelming. It’s easy to say, “save three months of take home pay” to build an emergency savings. However, for the 60 percent of Americans who spend more than they earn each month, this is a non-starter. It’s a big number without a concrete, actionable plan.
The good news is banks are developing a better understanding of this, and because the competition for customers is strong, most—including KeyBank—are making large investments in developing technologies and products that help people bridge the gap between spending and saving. For example, Key Active Saver™ links our interactive financial wellness tool, HelloWallet, with clients’ savings account interest rates.
The higher your financial wellness score, the higher your variable interest rate.
The idea behind these advancements in technology and service is to “reward” saving. If people can see an immediate benefit to their action—saving money, boosting their financial wellness and earning greater returns—than they are more likely to change behaviors.
Start with action, then work toward the numbers
A benefit of recent tax reform is that approximately 90 percent of U.S. workers are starting to see a slight increase in their take-home pay. Take advantage of it.
Establish a savings account and make automated contributions to it equal to the amount of extra money in your paycheck. Ideally, you can connect this account to a financial wellness tool to create additional incentives and rewards for saving.
Commit to spending less than you earn. In other words, don’t use the extra income as an excuse to spend more.
If you are on target to max out your 401k, terrific! Talk to your banker about establishing an IRA or other additional retirement account.
Have debt? Roll that extra income into your regular payment on high-interest credit cards. In addition to paying down a balance and saving on current interest, you can head off the impact of interest rate increases that might happen later this year.
Again, your increased income may not equate to thousands of dollars, but automating small, consistent contributions is an action that can get you to your big picture numbers.
Don’t wait to get started
Every day that passes where you hold debt or your money is not earning you more money is a lost opportunity. This is true whether you are 20, 35 or 65.
The first thing to do is to review your current financial situation. Analyze how much money you earn, how much money you spend, your monthly debt obligations and your total debt.
Next, establish your short- and long-term goals. Do you have a family? Do you want to start a family? Do you need to put yourself through college? Do you want to put your children through college? Do you want to travel, retire early or build your dream house?
Goals equip you to make informed decisions about what type of savings and investment channels are best for you—both short and long term.
If your goal is to save in the short term, consider a low-interest savings account, money market funds or certificates of deposit.
If you are looking to invest for the long-term, you can choose from a variety of investment products based upon what level of risk is acceptable to you, including stocks, bonds or mutual funds.
If you are investing for your retirement, the IRA (individual retirement account), Roth IRA, 401(k) and 403(b) are all options that offer the advantage of tax-deferral. Always take advantage of employee-matched contributions to your 401(k) if your company offers it.
Remember: even if you begin with small deposits, the compounding returns will add up. Goals that once seemed unattainable will become within reach—often times much quicker than you realize.
About the author: Stephen Fournier is president of KeyBank’s Central New York Market. He may be reached at either 315-470-5096 or [email protected].
Improve your savings by automating deposits
If you’re like most Americans, the term spare cash is not part of your vocabulary. Savings is just as foreign. Both are nice concepts, yes, but real and practical? Hardly.
If this is you, take heart. You’re not alone.
- 60 percent of Americans outspend their earnings.
- 81 percent of Americans have insufficient emergency savings.
- 25 percent of Americans using a direct contribution plan have withdrawn balances for non-retirement spending.
- 75 percent of Americans lack access to independent financial guidance.
So how do you break the cycle of never having enough money to set aside?
In a word: automate.
