If you tuned into most mainstream financial advice prior to the pandemic, a common theme was savers are losers. That catchy headline didn’t tell the whole story. What did they mean and is it accurate?
When you save your money at a traditional bank it collects about .01% interest, which is practically nothing. For example, if you left $10,000 in a traditional bank for an entire year the total interest earned would be $10.
On the other hand, using an online only bank (such as American Express Savings or Ally Bank) currently offers 1% savings. (Prior to Covid-19 it was 2%). So, for that same $10,000 balance, year-end interest would total $100. Much better, but nothing to do cartwheels over.
Now, consider the two options above in light of inflation. The current annual inflation rate is about 2.5%. This means that your purchasing power decreased by 2.5% each year. Remember when you could buy an ice cream cone for $1? That’s inflation.
Using the savings example above, you start with $10,000 in the bank in January and gain $100 in interest. Your balance at the end of the year is $10,100 but compared to last year you can only buy $9,850 worth of items (total balance less $250 inflation). When saving at a bank account is the only method used, an individual is effectively losing purchase power over time. However, saving is one of the safer vehicles to store funds.
The other option is investing. When investing, a person has the potential to make an average of 10% or more in interest, dividends, and gains in the long term. That means you come out ahead of inflation. Anytime you can make 3% or more on your money, you’re doing better than inflation. But there’s a catch, it’s not guaranteed and one could actually lose all their savings. We all saw what happened in 2008. This doesn’t mean investing is bad either. If used as part of a balanced approach, as discussed in a previous article, it’s very effective. But now back to savings.
Are savers really losers? No. If you look at it from a technical point of view money is lost in inflation. However, cash is still king! When life hits the fan as it did for all during this global pandemic it’s nice to rest easy knowing 6 months or more of operating cash is in the bank. It alleviates the stress of ‘will I lose my job?’ and similar challenges. Then we can focus on the more important things such as health and safety.
So, what’s the final answer? Have a solid savings account with the highest interest rate available and invest the rest. “Solid” may mean different things to different people. But at least 3 months is preferred. Ideally more. We’re already 5 months into this pandemic and not a lot has changed. So ideally 6 months to one year of operating costs in savings. That’s plenty of time to plan your next move. Everything above that can be invested. It’s best to only invest what you can afford to lose. And personal preferences and comfort zones vary. So do your research and make a plan that’s good for you.
But, if we’re being honest, saving goes back to habits and behaviors learned from our youth onwards. So what can we do now to get on the right track and help our children be on the right track.
Parents…
If you’re not the best saver that’s ok. Start small.
First build the habit. Start with an amount that you won’t miss. If that’s $5 a paycheck that’s ok! The first step is building the habit of saving and not going back to reach for it later. If you save a large amount it will feel good at first but the minute something arises the next step is to transfer from the savings and then it’s back to ground zero. Start small and set the habit of saving. As time progress, it’s good to slowly increase the amount.
Second, limit access to the money. Seeing our savings every time we login to our bank account can make it tempting to transfer the amount into our checking. Online banks and credit unions are good options because it is harder to access the money. Transfer can take a few days.
Lastly, have at least two savings. To say we will never access our savings is unrealistic. That’s what it’s for. However, we want to limit that access to emergencies or the actual goal. For example, a vacation fund. The money saved should only be used for our vacation goal, not because our favorite store had a flash sale 😊. The emergency or long-term savings should be harder to access. Such as an online bank or a separate bank or credit union from the main checking. The short-term savings can be in the same bank but change the name. Most banks have an option to “nickname” your account. So instead of seeing “regular savings” you will see “Trip to Spain” or something similar. Then before transferring there is a mental thought of “I’m taking money away from my trip to Spain”. That helps a lot!
Teenagers…
It can be hard to get teenagers to save money, but it’s possible. Let teens have an account of their own. They will feel ownership and pride in their account. When a teen asks for something and a parent says you have money in your account – almost instantly the next words are “it’s ok I don’t need it.” Especially if the money in the account is a result of the hard work they have done.
Bonus incentives help too. Give your teen options. Such as $50 to spend now or $100 but he or she has to put $60 of it in the bank and not touch it. That’s a big decision. Have $50 now or $40 now with $60 for later. The numbers can vary but the principle remains the same. Help your teen think through short term and long-term aspects of money. We as adults often struggle with this (more money in our paycheck now or bigger retirement fund later). So if your teens can master this principle before real life pressures come they will be far ahead of the curve.
Children…
This is probably the easiest and most fun of all because we are teaching habits and not overturning habits. Make savings fun for children. Get a piggy bank and watch it grow. Children that enjoy saving are most likely to keep those habits as they get older.
Regardless of our age and circumstances we can learn to save. Always remember, you got this!
Until Next time,
Crystal
Crystal Chantel is an accountant with well over a decade of experience in tax, finance, audit and accounting in New York and Florida. Each week in Money Talks, she’ll share her advice to help individuals to navigate their financial challenges! Looking for more advice? Check out her blog where she offers business, tax, and self-care tips for female entrepreneurs!