One of the most revealing personal characteristics that individuals develop is an attitude toward savings. It requires us to balance instant gratification with our future needs and life-style.

When we are young, we have a list of wants competing with our needs for financial resources. We can easily lose focus on the distinction between needs and wants, as the swirl of “the latest and improved” products compete for our attention. Factor in the ready availability of credit, which makes these purchases easier, and we can override our judgment as we rationalize the acquisition for all manner of “needs.”

When we place today’s wants above tomorrow’s needs, we are laying the groundwork for a diminished future.

The personal savings rate in the United States fell to zero in 2006. After the stock market crash of 2008-2009, the rate jumped to over 5%. This dramatic increase mirrored a change in attitudes of individuals toward their financial futures. When individuals, particularly baby boomers, realized that they could not depend on a retirement based on Social Security benefits and unsustainable public and private financial promises, they changed their savings habits. Many Americans experienced the uncertainty of not knowing if they would be able to afford retirement. By early 2009, instant gratification had given way to setting long-term goals for savings, investments, and retirement. Saving was back in vogue, if only temporarily.

Investment goals are somewhat different from savings goals. Each has its own purpose and outcome. For example, savings goals should specify a dollar amount and seek stability for the principal - money that you can count on to be there. Savings goals can be met with federally insured accounts, such as savings accounts, money market accounts, and certificates of deposit. Our savings goals should be met before we begin to invest.

Investment goals are met through the investment of some of our accumulated savings into securities, such as stocks and bonds. For most investors, the purchase of mutual funds and Exchange Traded Funds (ETFs) offer the best, most diversified approach to achieving investing goals. See Types of Investments for details on the variety of investments. Also, review Sections 3 and 4 in Investing for Retirement - Surviving a Financial Tsunami for details on planning and selecting investments.

Saving is a personal decision. As you develop financial and retirement plans, give priority to saving. It’s your future. Each household should have three to six months of living expenses set aside in savings. Without that cushion, unforeseen expenses can derail the best of investment plans.

To begin, review your current cash flow and then create a realistic budget, one that you can live with. It should balance current needs and wants with saving for your future.

Planning Savings & Investment Goals:

1. Start immediately.
2. Adjust your spending so that you can set aside money for savings each month.
3. Set aside six months of living expenses in a savings account.
4. Pay off debts - pay the highest interest expense debt first.
5. Set aside a portion of every wage increase into a savings/retirement plan.
6. Understand the cost of achieving a goal on a future date. Anticipate the financial cost to meet your financial goals.
7. Set short-term and long-term goals -
        Short-term: major purchases and maintenance items.
        Long-term: retirement and educational.

Action-steps:

• Prepare a Cash Flow Analysis.
• Prepare a Budget.
• Commit a specific amount of your current earned income to savings and investment.
• Enroll in your employer’s retirement plan - 401(k), 403(b), etc.
• Make annual contributions to your IRA - a Roth IRA if possible.
• Defer or reduce wants while you develop sustainable spending and savings habits.
• Develop priorities for investing accounts -
  • First - employer retirement plan - at least an amount that will receive the maximum employer contribution.
  • Second - Roth IRA - earnings and growth are tax-free.
  • Third - traditional IRA - provides deferral of taxes on earnings and growth.
  • Fourth - taxable savings and investment accounts.
• Move toward maximizing your contributions to retirement and savings plans when possible.