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Financial Wisdom

"It's better to do nothing with your money than something you don't understand."
O Magazine, February 2003

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CK Financial Resources
76 Forman Drive
Colchester, VT 05446
(802) 238-8187



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Posted on 6/24/2011 1:48:52 PM

These days it seems that the word “saving” has become one in the same with “investing.” In the dictionary saving is defined as “setting money aside for a certain purpose.” So I guess it’s easy to understand why many would believe that money put into an IRA and set aside for retirement could be considered savings. But is it?
Think about it. Retirement savings, or “qualified plans,” often come in the form of IRAs or 401ks, which tend to be made up of mutual funds that are invested in Wall Street. As we all know too well, “the market” goes up and down—and sometimes the drops can actually eat into your “savings”—significantly. So should we really count invested monies as savings?
It seems to be a cultural phenomenon that savings and investing are used interchangeably. For many people the difference is so subtle that they never give it a second thought. But when brought to their attention it makes a BIG difference as to their perception of soundness, or lack thereof, of their retirement “savings.” And that is the point.
Marketing blurs the line
When I was young, my parents used to tell me to put money into a savings account and it would be there when I need it. And the laws that govern that product (savings accounts) make that true. However, they also said that if I was going to “invest” in Wall Street it was risky and I should only play if I had money I could afford to lose. Funny thing though as I grew older, that BIG BOLD print about risk on the front page of a prospectus has somehow disappeared. Why is that? How did this happen?
I believe that the blurring of the line between saving and investing has been created in large part by the marketing done by the financial industry. They’ve become very good at it. The generation of people (Baby Boomers) who inherently understood the difference between saving and investing paid it little mind. They understood the difference between safety and risk. But times were good and the stock market was booming. The younger generation has little history, no clear understanding, and frankly, little defense against the drumming of the marketing beat.
Today we’re inundated with messages from the financial industry that encourage us to max out our 401ks, and invest in mutual funds and IRAs so we can “save for our retirement,” with little mention about market risks and lack of access. This is the mantra, which is rarely questioned. And if everyone’s doing it, it must be right. Right?
Well, if you were one that heeded this advice and put all your savings into a 401k or IRA, you may still be trying to recover from the devastating losses suffered during the recession—not to mention that you may actually need that money now to pay your mortgage, food, and other things but can’t get to it.(Well you can with an IRA, but the penalties may be pretty stiff. You can only borrow from a 401K and you have 5 years to pay it back – so be VERY careful!)
I read recently that in 2010 as many as 1 in 4 people with 401k accounts had loans against their 401ks because they needed access to their money. They hadn’t saved enough money outside of their investments to cover for job loss or other emergencies. That doesn’t say much for the amount of money we’re saving, which, on average, is a negative number. How can you have a negative savings you ask? Spend more than you make—it’s called credit and it’s not sustainable—just like our Government debt.
My feeling is that no one should be investing in Wall Street unless they understand what they are doing, where their money is, and the likelihood of success and/or failure—essentially the risks associated with their decisions. I don’t know about you, but I’m not too keen on losing and giving up access to my hard-earned money. I seek those opportunities that provide the most certainty and security. And they are out there. You just need to know where to look.
Savings Options
Consider the many ways you can save. You can stuff your extra money in the good old coffee can or stick it under the mattress. You can open up a savings account (FDIC insured) and put it in a bank. You can put it into an IRA that is subject to the rise and fall of the market. You can spend less. Or you could do any combination of these.
And, what’s the best way to make money? Don’t lose it.
Bottom line: “saving” money anywhere is better than not saving at all. But why save just anywhere when you can pick a place that is sound?
A Good Rule of Thumb
A good rule of thumb is to save 15 cents of every dollar you earn. If each of us had put away 15 cents of every dollar we’ve earned in our lifetime, we’d be just fine. So if you earn, for example, $50,000 per year, that’s about $7,500 per year (before taxes). Using the 15 cents rule, your goal would be to save about $625 each month. You should also strive to have at least 6 months to a year of savings as a cushion.
I work with clients every day that are trying to maximize their savings for retirement or, in other cases, find inefficiencies in their money so they can reduce their personal debt and start saving. You should be doing both. It can be done. And it’s not that hard to do.
Start Saving Early
If you have young kids, start talking with them about money early. Give them a small allowance (my opinion) if they help out around the house. Put away those birthday monies that grandma sends each year. Teach them how to save and teach them how to spend wisely. Give them a piggy bank or open a savings account for them. It’s never too early (or late) to start learning about how to save your money.
What are your thoughts on saving? Are you saving enough?

Reader Comments

E.M. posted the following reply on ;

Thank you Kirk for putting things so simply. I can honestly say that your advice has helped me get out of debt and stay out of debt making regular savings a habit rather than an occasional occurence. I can thing of many friends and family that I will be forwarding your blog to.

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