On top of the retirement saving crisis, people are not well prepared to weather even a small hiccup in their employment or inability to work due to health issues (and, of course, the corresponding mounting medical bills). According to an article on Bloomberg, middle-income households should have at least $4,800 tucked away as an emergency fund, and low-income individuals should have $1,600. Though it may be difficult, emergency savings can significantly reduce one’s need to depend on expensive credit card use or payday loans in emergency situations.
But after spending most of their paychecks on budgeted (and even unnecessary) items, many Americans find that there is very little money left over to tuck into savings. Yet, a robust savings account and investment portfolio is one of the most important components of financial well being. You probably even have clients who come into your office, worried they aren’t saving enough for retirement. How can we as professional financial advisors help them to be better savers and set themselves up for a more secure financial reality?
Let's take a more in-depth look at this savings crisis and examine ways for your clients to buck the trend.
CHANGE IS DESPERATELY NEEDED
When I advise clients, I always recommend they keep at least six months’ expenses worth of savings in their account. According to Chris Metinko of MainStreet.com, 47% of American adults have savings that could last them for three months or less, and 34% of adults don't have any emergency savings at all. Many people simply find it hard to allocate extra money in their monthly budget to put towards savings. Even when it comes to retirement, a large amount of people are not contributing enough to their 401(k) or IRA accounts to ensure a successful retirement. They simply feel they do not have the funds available to make these allocations.
As professional financial advisors, we know that establishing a solid saving plan is essential, and that having an emergency fund is a an important safety net. This is my call to action for my fellow financial advisors: we must all step up and take a tough-love approach to those who just can’t seem to give up that fancy car, those extra meals out, those nice-to-haves that are not need-to-haves, and so forth. There has never been a more important time to challenge our clients and others in our lives and communities: saving (and in my case, tithing) must come before thoughtless, meaningless purchases which basically amount to lack of personal control, sloppy thinking and bad spending habits.
THROW IN SOME TOUGH LOVE
The reality is that many people can find small (or even large) amounts of money to tuck away. Being creative helps. Here are a few tips that you can pass on to people in your workshops and educational efforts
- One NDTV article advises adopting a cash only policy to avoid building debt that's more expensive to repay. It can also help to forego carrying credit cards in one’s wallet – that way the person has to make the conscious decision to use a credit card rather than just using them at any time whenever the mood to purchase strikes. I encourage my most challenged clients and loved ones to utilize debit cards instead credit cards for the most part – of course, care must be taken not to overdraw one’s bank account and to live within a set spending plan
- According to Megan Elliott, personal finance writer for CheatSheet.com, 77% of employers who offer retirement plans will match contributions. That's free money our clients and family members need to take advantage of when available. If one qualifies for a matching contribution, make the most of it.
- Invest or save as soon as money hits one’s account. Making savings contributions automatic minimizes the amount of money in-hand to spend. This forces the individual to save and ensures that they are not tempted to spend the funds on something else.
- If the individual is going to get a raise this year, I suggest that instead of using those funds to buy more stuff, invest it. If one gets a 2% raise, for example, that money can be put towards savings rather than generating new expenses.
- Don't make big-ticket purchases on a whim. Always wait at least a week and do a large amount of research before deciding to pay for things like a new television or a washer/dryer set. Thoughtful individuals might even find that they can forego these big-ticket purchases without much negative impact to their quality of life.
If your clients or other individuals are not meeting their savings goals, it's time to push them to make some healthy changes. As professional advisors, we know that following a thoughtful savings plan is critical to protecting our clients’ long-term financial stability and helping them to be in a better place, both economically and psychologically. Let’s walk the talk – and throw in a little tough love when push comes to shove.