While people in other countries are saving 10%-15% of their annual incomes, the savings rate of Americans has fallen below 4%. According to the Commerce Department, savings as a percentage of after-tax income have been reported the lowest since the government began tracking the rate on a monthly basis in 1959. Saving money is not unspiritual nor does it represent a lack of faith. Saving money becomes wrong only when it turns into hoarding. Saving money in order to purchase a future need and prepare for the prospects of advancing years are signs of a wise steward. If saving money does not become a lifestyle, DEBT will!
Why save money?
First, you need to understand the difference between the terms save and invest. Saving money merely means to put it aside as a store or reserve. Investing money means to commit it in order to earn a financial return.
There are basically two practical reasons why you need to save money:
To build a strong FINANCIAL FOUNDATION and then
To build a strong FINANCIAL FUTURE.
How do I save money?
As basic as it might sound, before you can save money, you have to spend less than you spend. In order to do this, you must do one of two things or a combination of :
Limit your lifestyle and or Increase your Income
What should I do with the money I save?
Once you have identified the amount of money that you can save each month, those saved dollars should be systematically directed towards five goals called the "Five-Step Plan". The first three steps make up the financial foundation. Steps 4 and 5 are the keys to building a solid financial future. Steps 1, 2, and 3 should be accomplished in order. When step 1 has been completed, you can then start working on step 2. When step 2 has been completed, you can move to step 3. Accomplishing steps 4 and 5 will be a life-long process that will ensure a solid financial future.
Financial Foundation (Steps 1-2-3):
Step 1: Checking Account Reserve
Most Americans are living paycheck to paycheck (week-to-week) with little or no cash reserves to call upon in the event of a negative financial event. Assuming that your monthly budget is in place and all of your monthly expenses (including minimum payments on debts) are covered, all of your surplus dollars should be directed towards building a cash reserve in your checking account. How much? To start with, a minimum of $1,000. The reserve in your checking account will allow you to stop living week-to-week and serve as a temporary emergency fund until you can get to step 3 where you will build a real emergency fund in your savings account. If at anytime during the accomplishment of steps one through three you are required to use any of the $1,000, you must immediately return to step one in order to restore your checking account surplus to $1,०००.
Step 2: Debt
The second step is to systematically apply all of your monthly surplus dollars towards the elimination of consumer debts (credit cards, auto loans, student loans, furniture & appliance loans, etc.).
Step 3: Savings Account
The last step in building the financial foundation is the establishment of a real emergency fund (contingency account). The emergency fund should be used only for real emergencies! These might include unanticipated medical expenses, a temporary layoff, a transition between jobs as a result of downsizing/termination or unexpected auto repairs. Financial planners often recommend having 3-6 months living expenses set aside in a contingency account. I suggest your goal be a minimum of $10,000. The emergency fund is not an investment but rather a cash reserve. The emergency fund should be located in a place that guarantees safety and stability of principle and is completely liquid (easily and quickly converted to cash). A good place to store these funds would be a money market mutual fund (MMF), a credit union or even a NOW account at your local bank. MMFs are essentially as safe as insured money market accounts offered by banks, have check writing privileges and charge no withdrawal penalties, but pay 1%-1.5% more.
Step 4: Major PurchasesSteps four and five can be started simultaneously. At this point you are ready to begin building a strong financial future. The purpose of step four is to get you into a position to be able to pay cash for all of your known major purchases (autos, vacations, Christmas, household furnishings, down payment on a house, etc.). Paying cash for major items will allow you to enjoy the benefits of compounding in a positive direction. Compounding is magical, but when it is in a negative direction it's like a chain and ball. These funds should be stored in an account that offers safety and stability of principle along with liquidity unless the item you are saving for will not be purchased within the next five years. In such a case, you can consider options that might allow for a greater return.
Step 5: Long-term Savings
Step 5 requires that you begin investing your savings in order to financially for the long-term needs of your household and to increase your assets in order to serve God more fully. You need to determine your investment goals and develop an investment program that fits your tolerance for risk. Your enemies are inflation, taxes and procrastination (not necessarily in that order). I recommend that all of your long-term investments first be invested through your qualified investment option. As you gain control of your finances and begin to build wealth, you must be careful that you do not put your trust in your riches.
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