Ruth Mahoney, President, Capital Region, Keybank
Saving money and achieving financial stability rank among the highest priorities for most people. Yet most people struggle with both—often at the expense of their financial wellness.
According to Bankrate.com, only 39 percent of Americans have enough emergency savings to cover an unexpected $1,000 expense. It’s no surprise then that 65 percent of Americans fear unexpected expenses.
The question is why? If people want financial stability and are scared an unexpected expense will devastate their personal finances, why can’t they save?
If you put the inability to save in the context of a necessity to change, it becomes easier to understand. Change is hard. 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 goal without a concrete, actionable plan.
In recent years, many banks, including KeyBank, have made large investments in research and developing innovative technologies that help people bridge the gap between spending and saving. For example, Key Active Saver™ links our 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.
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.
Granted, the paychecks won’t be significantly larger. However, with personal tax rates being reduced by as much as 3 percent for the majority of workers, it does represent an opportunity…provided you take advantage of it. The following are some tips on how to make the most of the extra income.
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 small, consistent contributions are the foundation to realizing big goals.
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 6, 16 or 66.
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?
These are important questions. Answering them will help you determine your future goals and dreams, as well as 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: Ruth Mahoney is regional retail leader and president of KeyBank’s Capital Region. She may be reached at either 518-257-8619 or [email protected]
Automation and execution can drive savings
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.
If your employer offers direct deposit, use it to contribute a specified amount of your paycheck into a savings account. This has two advantages:
- It allows you to pay yourself first, and you don’t have to think about it.
- The savings happens without you having to lift a finger
Automating savings deposits opens the door to the power of savings, and this is where real behavioral change can happen. Because just as what you cannot see is not real, what you can see—money accumulating—is.
The next step in growing your financial wellness requires more than automated deposits into your savings account. It requires developing a realistic and executable plan that is made up of three parts:
- A clear goal – define a specific dollar amount and time frame, and break your overall savings goal down into manageable chunks.
- Purpose – Write down your goals and put them someplace visible. It is better to be reminded why you’re saving than to forget a vague ideal.
- Change – The secret to saving large amounts of money is to save small amounts of money on a regular basis over time. This requires making gradual but calculated changes to the way you manage your money.
Today’s new banking platforms that integrate accounts with financial wellness tools make changing and tracking financial behaviors easier than ever. To see what solutions are best for you, talk with your banker.
The truth is, as much as we dream about being on the receiving end of a financial windfall, it’s not likely to happen. The average person just isn’t that lucky. The good news, though, is that luck is not a factor when it comes to securing your financial future. What really matters is purpose, discipline and persistence.