If you’re like most Americans, you aren’t saving enough money. That’s a problem, because it means if unexpected costs come up — an emergency room visit, a car accident or a high air conditioning bill — they can create stress and even go unpaid. That scenario can lead to bigger problems, including escalating debt.
A June survey of 1,000 adults from Bankrate.com found that 65 percent of Americans lack substantial emergency savings and 29 percent have none. That’s the first time in the survey’s five-year history that so many people have admitted to having nothing saved.
“American household budgets are really tight. They haven’t been able to move the needle on savings over the past several years, and the inevitability of unplanned expenses has chipped away at what they had,” says Greg McBride, Bankrate’s chief financial analyst. It’s a huge problem, he adds, because not having money in the bank to fund a few months’ worth of expenses can keep you up at night.
While historically low interest rates haven’t made it easy to grow savings parked in bank accounts, they are not the cause of Americans’ paltry savings, McBride says. Instead, he attributes it to people failing to prioritize savings by paying themselves first, through automated transfers at the beginning of the month before everyday expenses eat up entire paychecks.
A June survey of 1,015 adults from America Saves, a Consumer Federation of America campaign to promote savings, also affirms that Americans are falling behind with their savings, even as the economy appears to be recovering from the Great Recession. Americans’ interest, effort and effectiveness when it comes to saving all declined from January to May, according to the survey. The largest decline was among respondents with household incomes under $25,000.
“It’s the first time we’ve seen a decline that large across the board, and it was kind of a shock to us,” says CFA spokeswoman Katie Bryan. She attributes the savings slowdown to the economy: “The economy is not coming back as much as we’d hoped. Low-income people are struggling to find jobs, and the summer with gas prices, vacations and other costs might be hitting people harder,” she says. “People just don’t have the money to save.”
When it comes to longer term savings for retirement, Americans seem to be doing a little bit better: Vanguard’s How America Saves 2015 report, released last month, reveals that more people are saving for retirement through their defined contribution plans, thanks largely to automatic enrollment and automatic deferral increases. The report found that 60 percent of newly hired employees participating in Vanguard 401(k)s were automatically enrolled by the end of 2014.
The report, which includes data on over 3.9 million plan participants, found that about 1 in 3 plans has an auto-enrollment feature, and among those, 70 percent automatically increase contribution rates for employees. Still, while enrollment rates have increased, contribution rates are relatively low: In plans with auto-enrollment, more than 60 percent enroll employees at a default rate of 3 percent or less of their salaries. Financial advisors generally recommend saving closer to 10 to 15 percent of your annual income toward retirement.
“Participation is improving,” notes Jean Young, lead author of the report and senior research analyst with the Vanguard Center for Retirement Research. Auto-enrollment plans have a 90 percent participation rate, while voluntary enrollment plans have a 60 percent participation rate. “We’ve moved the dial with education over the past several decades, but the real way to move the dial is auto-enrollment,” she says.
If you want to pump up your savings — both short-term emergency savings and long-term retirement funds, here are some strategies:
1. Make it automatic. McBride suggests signing up for direct deposit so a portion of your paycheck goes directly into your savings account each month. “It forces you to live on less than what you make, which is the essence of building wealth. Then, when unplanned expenses do come along, you’re only one paycheck away from starting to replenish it,” he says.
2. Let go of your “stuff.” Material items are appealing, but splurging can detract from your larger goals. “People like their stuff; it’s as simple as that. So many times people look me in the eye and say. ‘I can’t save any money,’ while they hold a $5 coffee and $600 iPhone,” McBride says.
3. Prioritize emergency defense. While paying off debt and saving for retirement are important goals, having a basic emergency fund should be top priority, Bryan says. “We tell people to get $500 or $1,000 saved. That will really help you when your car breaks down or you have a doctor’s visit — those little things that pop up three or four times a year,” she adds.
4. Join the plan. “If you’re not in the plan, get in the plan,” Young urges, referring to company 401(k) plans. She suggests contributing at least enough to benefit from any match offered by your employer and to aim for a savings rate of 12 to 15 percent. “Increase that savings rate every time you get a raise until you get to 12 to 15 percent,” she says, which includes any employer match.
5. Invest well. That might mean choosing a target-date fund that automatically shifts money into more conservative choices as you get closer to retirement, or making those selections for yourself by rebalancing your portfolio at least once a year. Still, Young says, “you can’t invest your way out of a savings shortfall, and everybody with access to these plans should probably be saving more.”
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