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Save Your Cash for the Future

It is only natural that businesses find creative ways to get your money. In fact, marketing has gotten so good these days, tag lines and phrases such as “you’ve earned it” or “you deserve to treat yourself” make the feeling of spending money good and give it significance.  How many cars do most people “own” over a 5-year period?  How much “stuff” do we have, and do we pay for storage of this “stuff”?  I am not against treating yourself occasionally or businesses finding creative marketing techniques.  But there is nothing wrong with saying no in favor of saving your money.

What is missing from the “saving money” conversation is the truth and fact that one day, you will encounter a financial setback.  This may take the form of a major repair on your home or car, unforeseen medical expense, job loss, sudden death of a loved one, or the need to put a loved one into long term care.  These are not exciting prospects to consider and come with their own set of difficulties or struggles.  But the struggle is compounded when there are no resources available to help you through the issue.  And even with a saving account to battle these challenges, you may end up exhausting all available resources.  But at least you can wade through it in the short term and maybe it gave you back precious time you needed with a loved one.

Saving Solutions

  • IRA & 401k Contributions – During my early 20s, I had the opportunity to really stack away money in both my 401k and IRA.  Plus, the company matched a large portion of 401k contributions.  I didn’t take it seriously and later on; I used my 401k for frivolous things that did not appreciate in value. 

These retirement saving vehicles need to be taken seriously.  They give you the ability to put either pre-tax or post-tax dollars away for retirement and build equity.  The compound effect over time is substantial when you consider the stock market trends.  Refer to the IRS for max contribution limits to your IRA and 401k.  Don’t forget to consult a financial advisor.

  • General Saving Account – Nearly 37% of Americans would need to borrow some funds in some form in order to cover an unintended $1,000 expense according to a Bankrate.com survey during January 2020.  The average unintended expense totaled over $3,500.  While that percentage seems low, consider this was prior to the COVID-19 pandemic and shutdown here in the U.S.  In April, unemployment hit nearly 15%

We generally overlook the significance of having a saving account because banks are not incentivizing consumers to save anymore.  Interest rates are so low, there is barely any margin available for consumers to take advantage of.  But getting a good return rate on a saving account is not the reason to have one.  Quite simply, you need a saving account to manage reserve funds for anything major that can go on including losing your job or being temporarily shut down.  This is not a common occurrence, but the unexpected is always reliable.  My recommendation is carrying 3-6 months in reserves.

  • Your Home’s Equity – The equity in your home seems like a good vehicle for holding that “reserve” account for the unexpected.  But consider this; you must have income to tap into that equity and the market must be ripe with the opportunity to access the cash.  If you lose your job and/or the interest rates dramatically increase the monthly payment, it’s very difficult to justify a cash out refinance or Home Equity Line of Credit. 

Using your home’s equity for reserves should be considered carefully and ideally, you want to access it when you do NOT need it.  “What’s the point of this” you might ask?  Because when you are actively employed and the market supports all-time low mortgage rates, you likely can qualify for a competitive payment that doesn’t break the bank personally by much, depending on how much you take out.  Again, this is something you consider very carefully.  The equity you draw should be used to pay down debt, improve your home, or set up that 3-6-month reserve account discussed.  It’s not meant to be a rainy-day fund when something comes up you want to purchase.

Good financial discipline means planning for the unknown good or bad.  The outcome of that challenge is a little easier to face with some clarity when one of the obstacles is accounted for, reserve assets.  I strongly encourage readers to consider their financial position and ask an honest question; “if I lose my income today, can I support my family or myself for 3-6 months until I find new income”?  If the honest answer is no, then it is time to reduce spending, pay down debt, and consider leveraging your home appropriately to invest into your future. 

The positive side of financial discipline is the freedom you will gain when you are ready to retire or possibly re-invent yourself with starting up a small business.  You may not experience a hardship and that would be outstanding.  You should be thinking about your future in terms of what you want your retirement to look like.  When you have assets, whether liquid or as investments, you gain more flexibility and options in the marketplace.  This is what savings is about.  You owe it to your family and your hard work over the years to be financially secure.