Winning the Savings Game

Brian S. Thompson is an entrepreneur and a partner at Marketing Full Speed, Need New Biz, Milwaukee Bouncy House, Milwaukee Tree Care, Milwaukee Radon Mitigation, and North Central Radon Mitigation. 

The average American spends $1.20 for every $1.00 that they earn.  Think about that for one minute.  Let that sink in.  You mean the average American spends more money than they actually bring in? Yes.  Debt is at an all-time high in the United States and credit cards are not the only issue.  School loans and miscellaneous debt are up considerably over previous years statistical data.  Although this post may be about money, I don’t want to bore you with tons of frivolous statistics and mind-numbing debt to income numbers.  However, what I do want to do, is give you some practical knowledge on how you can start playing offense and quit playing defense with your current financial situation and your future.

As mentioned before, the average American spends $1.20 for every $1.00 that they earn.  In reality, Americans should be saving AT LEAST $.20 on every $1.00 earned.  Now I know what you are thinking…I live paycheck to paycheck, this is impossible, I have kids, a family, etc.  Believe me, I understand.  I have felt the same way too. Furthermore, I cannot deny that there are indeed people out there that definitely can’t afford to save 20% each month. However, I also know that there is a large group of people who could save 20% each month, if they checked their spending habits. I also know there is another large segment of the population that may not be able to save 20%, but they could save something…maybe 15%, 10% or even 5% is better than nothing at all.  With that being said, here is a very simple strategy that has helped me stay focused on my current and future goals, while not sacrificing too much fun and leisure. 

One should save at least 20% during each pay period.  Of that 20%, 10% should be allocated for the short term and 10% should be allocated for long-term savings.  Each pay period, 5% should go into a liquid savings account.  This is your emergency fund.  The tire blows on your car, an unexpected medical bill, etc. This money is not really savings at all but rather deferred spending dollars.  It should be liquid, so you have access to it whenever needed, and if it isn’t needed, you can move it to a different savings “bucket” or you can choose to treat yourself (for being disciplined in saving) at the end of the year and spend a portion of it on a new toy or a vacation.  This is the most important savings bucket, and if you don’t fill this one, don’t proceed to the others. 

This must come first. 

You can begin getting more aggressive on your other savings strategies when this emergency fund reaches 3-6 months’ worth of your current salary.  That way, if you unfortunately lose your job or you become temporarily injured or ill, you can continue to pay your bills without worry for at least 3 months. 

The second 5% allocated for short to mid-term goals should be dedicated to a riskier account, especially when you are young in age.  I like to look at 3-5 years down the road, know what I want, and invest this money with a strategy to get there.  Mutual funds and index funds are great candidates for this 5% as you can let your money work for you and get a relatively quick return, from an investment standpoint. This will only motivate you to want to save and invest even more down the road. 

The first savings area for long-term savings is only 3%.  This percentage is lower because with long-term investments, you can afford to take a little more risk since you have more time to recover.  Therefore, this 3% is traditionally your chips off the table money…your ace if you will.  A lot of folks use bonds in this category or even permanent cash value life insurance to help bridge the retirement gap with tax free dollars down the road.  Whatever you choose, it is important to keep this at right around 3% because you will get a better return elsewhere. 

Lastly, the final long-term savings plan should remain at right around 7%.  This is your IRA, your 401K, or any other retirement vehicle you may use to leverage the stock market and make serious returns over the long-term.  As aforementioned, you want a larger percentage dedicated to this savings vehicle because it will grow and compound the quickest over time.   

In summary, I hope this simple strategy helps you get serious about your savings and your financial goals.  Savings, especially long-term savings, is more important now than ever before.  With social security dwindling and fewer and fewer companies offering pensions, it’s imperative that you take hold of you present, and future, financial situation. 

Thank you, Josh, for having faith in me and allowing me to post on your website.  As always, keep grinding and stay saving!

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