Are you a saver or a spender? Why should you care?

savings ratesRecognizing your bad habits will help you on the road to better understand how to correct them. The problem is, most people don’t even see a problem to begin with. The fact is, most people under 30 or 40 are spenders, and have pushed saving aside for the latest TV, iPhone, shoes, purse, clothes, car, or whatever the latest trend may be. To their credit, this may not be their fault, consumerism and advertisers have done their job and created a need when there really wasn’t one. It’s only the consumers fault when they recognize what they’re doing, and don’t change their habits.

So, are you a saver or a spender? Do you even have a savings account? Do you look at your checking account as a spending account? Most people look at their checking account balance as how much they have left to spend, and they shouldn’t. You must set aside money separately to build a savings and investment nest egg for your future. It makes sense to setup a savings account separately, and most companies with direct deposit allow you the ability to have a portion deposited to savings and the other to your checking (this way you don’t even miss it).

The point in writing this article is awareness, to make you aware that you’re probably a spender, not a saver. If you’re questioning what constitutes being a saver or spender, wonder no more; A good rule would be that if you’re  not putting aside at least 10% of your income into saving, you’re a spender.

As shown in the graph above, at one time not long ago (20 years ago we had household savings around 7-8% in the US) we were closer to a nation of savers instead of spenders, and if you look back 20 years before that, the US savings rate was at or above 10%, see below.

savings rates historicalSo why should you save versus spend? Do you want  to always have to work for money, or would you rather have your money work for you? Most people don’t even understand this concept or way of living, and are forced to always work for their money. Most of the wealthiest people start off in life like you or me, working hard for money. The difference though, they take a small portion of their money and save and invest, earning money on their money, forever and ever, providing an additional income of which they will never have to work for again. You may question “how will I ever be able to save, I can barely meet my bills.” If you’re saying this, you need a budget, and better get started sooner than later – you’re going to be buried in debt before you know it. Even the worst situations can be overcome, with time and patience and understanding. But don’t delay, get started now with the help of this site or something similar.

Now that you are aware, maybe you should consider making the choice to put something aside every paycheck, and become a saver.

Financial planning advice in your 40s

40_year_oldWe’re going to make the assumption that you’ve been investing now for some time, maybe not too long though. Now is a great time to reevaluate where your portfolio stands, and think about reallocating assets to somewhat less risky choices. Our rule of thumb is 120 less your current age, should be your stock to bond ratio. So Say you’re 45, that would mean take 120-45 = 75. You should be at around 75% stocks now, with 25% in less risky money market accounts and or bonds. Granted, that’s somewhat aggressive, if you want to be conservative, use a factor of 100 instead of 120 (100-45=55%) and your mix would be 55% stock, 45% bonds. So, by now, your asset mix should be some where between 55%-75% stocks. You’re probably saying that’s a huge swing, which is true, but the more aggressive path should be used by those trying to make up more ground, while the conservatives would be those who started investing earlier and their interest is in preserving capital, not necessarily being risky to accumulate more.

Good financial planning advice in your 40s is to not panic, remember that you still have around 20-30 years to reorient your finances and optimize your retirement fund. If retirement saving has not been topmost on your agenda till now you need to consider maximizing your contributions to the top limits on any 401k or IRAs that you do have, and consider pumping up as much as possible with the catch-up contributions.

It is good to not rely solely on employer-sponsored pension type plans and buy into at least one private retirement fund plan. Your 40s are the ideal life stage to review and adjust your financial assets or to get going if you’ve procrastinated til now, remember, you still have a bunch of time to make up. Look at the big picture when it comes to your whole financial position. If you have been investing aggressively in the more volatile investments such as stocks and mutual funds then now is the time to move toward consolidation. Scale back on those stock options to around three quarters of your total assets, and move that cash into saver options such as bonds and or certificates of deposit.

As you enter your 40s, you will probably be at or around the peak of your earning power. You need to review your financial portfolio so the mix of funds can move from growth-oriented investments to wealth consolidation funds, while re balancing your holdings towards those in money market and bond funds. Your late 40s may even be the time to consider buying an annuity for early retirement. Annuities can be a good way to make good a shortfall between your projected income and your life expectancy.

A necessary piece of financial advice in your 40s is to make the best possible ‘guesstimate’ of how long you will live and to set financial goals accordingly if you haven’t done so already. If you want to leave a maximum of assets to the beneficiaries of your estate, then you will require a different investment strategy to a situation where you simply want a good income for the whole of your life and leaving nothing ‘on the table’ when you die. If your best estimate of life expectancy is say 85 and your investments only give a target income to 80 then an annuity can provide the extra five years of income and will cost you less if you buy it in your 40s. Consider a living will too, if you already haven’t done so.

As your retirement approaches, the balance should shift further from wealth consolidation to bonds that yield a regular income stream but without reversing your capital growth rate. You should still hold on to some growth funds in your portfolio to ensure that your assets will be sufficient to see you through the remainder of your retirement in the lifestyle that you want.

Financial planning advice for your 30s

30sGood financial planning advice for your 30s

When you are 30 something you are probably beginning to reap the rewards of your study and hard work with a bigger salary. If you started a retirement fund in your 20s, then good financial planning advice in your 30s is to keep it up. Add to your 401k and IRA accounts with contributions through your 30s. Most experts agree that you should be investing around 10% of earnings by this stage in your life. As important as cash investment is, investment in learning about investment. By proactively learning to control your own investments you can avoid being scammed and save a great deal of money on brokerage fees and financial advisers.

If you are in your 30s and have not yet started to save and invest for your future then the only good financial planning advice is to start NOW! You will have to save more than 10% to make up for lost time. Most Americans change jobs several times over the course of their working lives. Do not waste time and money by allowing periods of non-contribution to your 401k to occur with new employers.

Good financial planning advice in your 30s has the following three aspects in priority order.

* First – pay off any outstanding debts and live within your income. Unsecured debt such as credit card balances that carry over from month to month are very expensive. The interest rate that you pay on debt far exceeds the interest that you earn on savings. So pay it up as soon as you can and avoid it from then on.
* Second – maximize your retirement fund savings in your 401k or IRA. The tax deferment benefits are excellent so time spent without contributing or contributing less than the maximum is like refusing to take free money.
* Third – add to your home equity balance whenever possible. This saves you large amounts of interest on your mortgage.

Most Americans buy their first homes when in their 30s. They also probably see this real estate as an investment that will appreciate in value and contribute to their retirement income when that time comes. For your home to be a good investment you need to think in terms of the equity you have in it. This is the actual amount of money in your home value that is yours and not a mortgage. It is best to minimize your mortgage when you first take it on by maximizing your deposit and paying cash for the set-up and administration costs. A good idea is to then take any salary increase you get and increase your mortgage repayments or continue with repayments at high interest levels even when the interest rate goes down.

Financial planning advice in your 20s

20sSaving now is the best financial planning advice in your 20s.

If you are in the second decade of your life you are just beginning your economically productive period. Your income is at the bottom of its (hopefully) upward curve while your economic needs are at their greatest. Here are four pieces of financial planning advice that, if heeded will enable you to have an effective financial life.

1. Save at least 10% of your income. This is very difficult because the human psyche tends to discount the future. We all seem to feel that having things today is two or three times as valuable as having them in ten years time. But also be aware that there will be lean times in your life and it is up to you to carry some fat over to help you through those times. When you finish working you must have sufficient savings to have the lifestyle of your choice. Save 10% for a minimum standard of lifestyle, 15% for a good standard, 20% for affluent choices. This rule of thumb will work for you only if you start saving for retirement early in your 20s.

2. Live within your means and this includes 10% saving from your current income. It really isn’t optional! Save money to buy the things you want in the short term. They can often be bought for a discount when you negotiate with cash. Avoid getting into debt if at all possible but if it is too late for you, work towards becoming debt free as soon as possible. Invest early and aggressively to get the benefits of compound interest. The only way to survive lean times is to have savings set-up that help you to manage your finances.

3. Time is your greatest asset when you think of financial planning in your 20’s. At this time in 2009 the economy is at the bottom of the business cycle. Looking ahead you can expect a number of booms to be followed by a number of busts. So plan for the worst and hope for the best. Don’t invest at the top of the market and be proactive in converting stocks and higher risk investments to bonds and certificates of deposit before stock market bubbles burst.

4. Unfortunately, you can no longer rely on Social Security to carry you through your retirement years. Investing is not just for people with a large capital sum. Start now and choose safe, long-term investments that put your principal out of reach. This prevents temptation for short term spending. Options to explore are Individual Retirement Accounts that provide valuable tax deferments as well as compounding interest on your investment. Spending temptation can be removed if you go for a 401k. This is a savings plan that automatically deducts from your paycheck and can give you a healthy nest egg later in life.