The most recent data released by the U.S. Department of Commerce shows that the growth in the personal savings rate may be leveling off, but there’s no question that a massive shift from a population that routinely overspent their earnings to a more frugally-minded society has occurred. Despite the continued traffic around the Nordstrom and multiple Starbucks I pass each day, apparently we really are spending less, with the current personal savings rate hovering around 6%.
The motivations for frugality obviously vary from person to person. Some are without work, some unable to continue using their homes as ever growing lines of credit, some have always lived this way and are just now willing to show their faces to friends and neighbors as proud, thrifty citizens.
The purpose of this post, however, isn’t to debate the merits of a life spent saving so that one can achieve their goals. As a financial planner, I hope you know where I stand on that argument. This is, instead, a much simpler message to those of you who have made the decision to boost your savings in the recent past.
First, a pat on the back. You’re taking smart steps towards either getting back on your feet financially, achieving your goals for the future or both. You should be congratulated for making the most out of the difficult situation that has been the world economy over the last several years.
Now, the tough part. How much are you saving? Is it enough? All that you can? What goals do you have for your savings? Where are you putting your savings? Is it earning anything at all? Are the spending cuts you’ve made being eaten up somewhere else in the budget? Are you simply cutting back or is there a true plan and purpose behind what you’re doing and why you’re doing it.
These questions aren’t designed to get you down or to make your efforts appear inadequate. Rather, it’s to encourage you to maximize the fruits of your efforts. Without proper understanding about how much you’re saving and what you intend to do with those savings, you’re likely just feeding a deposit account or money market somewhere and being rewarding with a laughably small interest rate if you’re earning anything at all.
This is a great time of year to review how the savings plan is going. If you don’t have a specific budget, take some simple first steps. Look at your January bank statement and your balance as of the start of the year. Now take a look at how much you’ve put into that account year to date. Now, the ending balance as of August 31. How much have you saved? Will you be able to continue that through the end of the year? Are you likely to blow it on eating out and buying gifts as the holidays approach?
Take the time to talk with your advisor, spouse or whoever you discuss financial matters with and work through the purpose of your savings. It can be as simple as reviewing your balance sheet and seeing what needs the most attention or doing some simple goal planning to see which carrot you can achieve next with the additional funds on hand. If you have a family, it’s a great time to discuss where priorities truly lie, if anyone has experienced any undue hardship with the new savings, and what the family would like to achieve together with the additional funds.
In the end, seeing that your sacrifice went towards paying down meaningful debt, getting that education fund started or adding to your 401(k) will be infinitely more beneficial and rewarding in the long run than just blindly cutting back.
Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, Ohio
