Are you saving enough? There’s about a 50% chance that the answer is no, according to a recent survey.
This lack of savings has left a substantial number of Americans in economic peril, either because they’ve failed to save adequately for retirement or because they don’t have enough socked away to handle short-term emergencies. A single unplanned expense, such as a doctor’s bill or a car repair, could send such people toppling into the arms of predatory lenders or bankruptcy.
Most of these substandard savers “are conscientious, hardworking people who are trying to do the right thing,” said Stephen Brobeck, executive director of the Consumer Federation of America. “But they are at financial risk and they could be doing more to reduce that risk.”
To mark its second annual America Saves Week, a coalition of 1,000 companies and other organizations last week publicized tips on how to save more. The reason these groups care: People are better consumers, better citizens -- even better soldiers -- when they’re economically stable.
“We equate financial readiness with military readiness,” said Cmdr. David Julian, deputy director of a Defense Department division that is focused on families and is part of the America Saves coalition.
Even a small savings account -- holding $500, or $1,000 -- could forestall disaster and serve as a linchpin to building lasting wealth, experts say. But that wouldn’t cover a typical unexpected expense costing $2,000.
Why don’t people save more?
The most common reason people give is poverty, but that’s usually just an excuse, not the reality, Brobeck said. Although some people who have recently lost a job or gone through a divorce may be temporarily unable to save, a decade of research has found that the vast majority of Americans can save at least small amounts if they are willing to address their spending.
Too often, however, people don’t think about where their paychecks go, so they fritter away money on rented videos, fast-food lunches, lattes and other small indulgences without ever stopping to think about the accumulated cost.
Consider: A $5 daily McDonald’s or Starbucks habit costs $150 a month. Over 10 years, that $5 a day adds up to the cost of a car -- $29,086, to be precise. That assumes you would have saved the $5 a day and earned an average of 10% on your money over time. (This is the average annual return of big-company stocks, according to Ibbotson Associates, a Chicago-based research firm.)
Over 20 years, that same habit could rob you of a down payment on a $500,000 home. If you start now and save your $5 a day at 10%, you’d have about $105,000 in 2028.
Or over 40 years, the $5 a day would add $808,000 to your retirement nest egg. That’s enough to generate monthly income of almost $3,400, assuming a 5% average return, without ever dipping into the principal. In other words, it’s enough to build a measure of retirement security.
“Building wealth and paying down debt are goals that every one of us should hold dear,” said Dallas Salisbury, president of the Employee Benefit Research Institute.
Here are some simple ways to stop making excuses and to start saving more.
Split your refund
This year you could get more cash back from the Internal Revenue Service than ever before, thanks to the Economic Stimulus Act. The measure temporarily cuts 2008 tax rates and will deliver a one-time check of $300 to $600 per taxpayer, plus $300 per eligible child.
Although government policymakers would prefer that you spend the windfall, Salisbury recommends using it to pay off debt or launch a savings program. The IRS can help by directly depositing your refund into as many as three accounts -- say, a third into checking, a third into savings and a third into an investment account. If you want this option, fill out a Form 8888.
Bank your change
The Treasury estimates that Americans have $15 billion in coins lying around at home. Those nickels and dimes ought to be gathered up and put in the bank, Brobeck said. The interest rate you earn on the small savings account that results will probably be paltry, but that’s not a concern. The money wasn’t gathering anything but dust before, he said, so any amount of interest earned is found money.
Add to your 401(k)
Most large employers offer a 401(k) or other savings plan under which employees can opt to have a portion of their pay set aside for retirement. The money comes out of your pay before taxes are computed, so your net cost is actually less than your contribution.
For example, if your highest income tax rate (counting federal and state taxes) is 25%, you could contribute $100 a month but your take-home pay would drop by only $75. The remaining $25 is from income tax that you didn’t have to pay.
Better yet, chances are your employer will match your contributions at a rate ranging from 25 cents to $1 for each dollar you contribute. That supercharges the investment returns on what you contribute, allowing you to build significant savings in a fraction of the time it would normally take.
And if you suffer an emergency and need the money, most employers allow you to borrow as much as half of the account value, or $50,000, whichever is less.
The best way to build wealth is on a schedule, Brobeck said. Most banks will let you set up an automatic debit, sending a set amount from your checking to your savings account each month.
Even if all you can afford is a small amount, that small amount will accumulate over time.
Trim a luxury, pay a debt
If you have high-cost debts, you ought to cut back on discretionary spending -- such as movies and restaurant meals -- and use every available dime to beat back the debt, Brobeck said. Once the debt is paid off, you’ll find yourself relatively flush because you’re not wasting today’s money paying interest on yesterday’s pleasures.
If you’re having trouble paying off debts or meeting your savings goals, Brobeck suggests that you seek help from a credit counselor. To get a referral, contact the National Foundation for Credit Counseling at (800) 388-2227 or www.nfcc.org.
For more information about America Saves Week, go to www.americasavesweek.org.
Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past Personal Finance columns, visit latimes.com/kristof.