The nation's personal savings rate is sliding again, dropping to just 3.8% of disposable after-tax income as of June.That's not the lowest rate ever recorded by the Bureau of Economic Analysis,but it's close.
Many Americans clearly have trouble stashing away money. Here's a look at some tips that could helpand some dangers to avoid:
The 50/15/5 rule
Recognizing that people find it difficult to stick to detailedbudgets, Fidelity Investmentshas come up with another guideline. It's called the 50/15/5 rule. With it, you aimto spend no more than 50% of your take-homeincome on essential expenses such as housing, transportation and food, while striving to save 15%of pre-tax income forretirement in a workplace 401(k) account (or similar plan) and atleast 5% of take-home pay for emergencies.
That still leaves 30%of your income to spendin other ways, without trying tomicromanage every penny. Fidelity said its researchers analyzed hundreds of scenarios to develop thisguideline. It's similar to the50/30/20 rule, which involves spending 50% on essential items, 30%for other expensesand 20%in savings, without specifying between retirement and an emergency fund.
For many, thebiggest challenge would be keeping essential expenses tojust half of your paycheck. In addition to housing, transportation and food, essential outlays might include property taxes, insurance, utilities, child care costs, debt payments and health care.
A 15%target for retirement savings is ambitious, but the amount can include employer matching funds, if any. Evenif you can't startthat high, savewhat you can and build it up gradually, Fidelity suggests. The goal of saving 5% for emergencies is to end up witha rainy-day fund capable of meetingsix months of essential expenses.
Differentperspectives on savings
Sometimes, it helps to re-frame the savings challenge, to think of it in a different light. Among 54 savings tips discussed at Americasaves.orgare a few that might help you look at savings in a new way.
For example, one tip suggests that you analyze a purchase not in terms of dollars spent but in terms ofhours worked. For example, if youearn $15 an hour after taxes, you might think twice about paying for a week-longvacation requiring perhaps100 hours of labor or a new vehicle costing the equivalent of 2,000 hours.
Another tip is to delay nonessential purchases for at least 24 hours, so that youminimize impulse buying. This can be easyto do if you use an online shopping website that allows you tosave items on your list that you can go back and purchase later, if you want.
Americasaves, a program sponsoredby theConsumer Federation of America, also provides other tips, some quite basic,such as sticking to water rather than more expensive beverages while diningat restaurants, setting up automatic-savings payroll deductions and designating at least one day each week as ano-spend day.
MyRa accounts on the way out
One savings vehicle that just didn't get the job done was the government-sponsored myRA account.The Treasury Department recently announced it will phase out myRAs and no longeracceptnew contributions, citing "extremely low" demand.
MyRAs debuted a few years agowith the aim of givinglower-income Americans a secureplace to save. They came with no fees or minimum-balance requirements, while offering tax-free growth of earnings. But oneproblem was that the accounts mandated thatsavers invest in low-yielding Treasury bonds. The taxfeature wasn't unique either, given the availability of RothIndividual Retirement Accounts (myRAs were a type of Roth IRA).
"Existingalternatives to the myRA were superior because they allowed workers to invest in a variety of securities, while the myRA restricted investments to U.S. Treasuries," noted the Institute for Policy Innovation in a commentary. "Treasuries are lousy retirement investments."
Jovita Carranza,U.S. Treasurer, acknowledged as much in shutting down the program. "Ample private-sector solutions exist, which resulted in less appeal for myRA," she said in a recent statement.
Clustered shocks
The key reason toamassemergency savings is to cushion the blow from possible shocks to yourbudgetlike a job loss or bigmedical bill. Sometimes, though, your rainy day fund might need toabsorb the damage from multiple disruptions at the same time.
A study by TheNew School,commissioned by the National Endowment for Financial Education,found that nearly everyone is at risk of enduring occasional periods when income dries up andexpenses balloon, whetherfroma job loss, health crisis, divorceor something else. Such budgetdisruptions often cluster together.
The study foundthat most people, at least occasionally, endure annual income declines of at least 10%. The researchers found that96% of American menseetheir income drop at least that much on four or more occasions by the time they reach70. Among men, three in five survey participantsreported at least one episode where they had no job-related earnings for an entire year.
"Thisresearch shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be," saidTed Beck,president and CEO of the National Endowment for Financial Education.
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The most damaging consequences sometimes result fromdeclining health, including long-term illness and work-limiting disability. But whatever the catalyst, people who must stop or curtail their employment often decimatetheir retirement accounts by permanently withdrawing funds, paying penalties and haltingnew contributions. Hence the importance of having emergency money on the side.
Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.
