What Americans Can Do To Save More
In the media one frequently finds stories regarding the difference between the savings rate here in the United States and the rates in Europe. I go to Europe once or twice a year to referee world title fights. Because English is THE international language, I get to hear a lot of conversations among people from all over the world. How-ever, most of the conversations are about boxing, and one does not typically ask a new acquaintance, “How much do you save?”
So I will assume that what we see and hear in the media is true: that Europeans tend to save 15% of their disposable income, while we here in the U.S. normally save 3% to 4%, or less.
The question becomes, “How can the Europeans, who frequently pay taxes of almost 50% of their incomes, save so much more than the average American, who pays closer to 30% of income in taxes?” One reason, of course, is that Europeans receive national health care and free education as part of their tax package.
That being the case or not, we should be concerned about our generally low savings rate, and see what we can do to improve it. Woody Allen said that, “90% of success is showing up.” An-other view holds that success is sim-ply, “doing better.” So, how do we “do better?” By doing it an inch at a time.
A rule of thumb says that 10% is a desirable savings rate. That’s well and good, but what if your savings rate is a paltry 3%? Increasing it to 4% is a 33% increase! You’ve got to crawl to walk, and walk before you run. What follows are some tips on how to get moving. View it as a Swiss Army Knife of savings.
The first place to look to increase your savings is in “qualified plans.” Examples of qualified plans are 401(k)’s and 403(b)’s. These plans are qualified with the Internal Revenue Service to receive certain tax benefits. The first benefit is that you get an income tax deduction for your contributions. For example, if you contribute $100 to a qualified plan, your cost is $100 minus your tax rate. So, if you are in the 30% bracket, your out of pocket cost to contribute $100 is $70.
You can make the deal even sweeter if your employer has a matching program. Many do. Let’s say that your company has a matching program on the first 3% of salary that you contribute.
Assume that you earn $65,000 annually. If you contribute 3% of your salary, which is $1,950, your out -of- pocket cost is $1,365 ($1,950 x.7 because you are in the 30% tax bracket.) Well, if your employer matches your 3%, the total contribution is $3,900 and your out-of-pocket cost is still only $1,365! Do I have your attention? Good!
Another way to increase savings is to reduce spending. Sounds simple, yet it is effective enough. Take a look at your recent bank statements and review how many cash withdrawals you make each month. Banking industry statistics show that the average bank customer makes an amazing 10-15 cash withdrawals each month.
A surefire way to increase savings is to get rid of those high interest credit card payments. Although general in-terest rates have come down, it seems that credit cards never do. And, you have to carefully watch your statements so they don’t nickel and dime you (if only it were nickels and dimes) with overdrafts and late payments. Home equity lines of credit are currently 4% to 5%, as compared to credit cards, which range from 12% to 22%.
When I was a banker in the late 1970’s the state usury law was 12%. How times have changed.
Another way to increase savings is to do it automatically. Insurance and investment companies are more than happy to dip into your bank account monthly, quarterly or annually to fund insurance premiums and investments. If you don’t have the money have in your hot little hands, it’s a lot easier to save it.
There is an advantage in savings through qualified plans as enumerated above, but let’s not forget Section 529 plans. These fairly new savings plans for education expenses are quite at-tractive, because if you use the savings for higher education, you are excused from paying taxes on any gains in the account.
Lastly, if you don’t already have a home equity line of credit, get one. Using the money from this source has two advantages. The first is that the rate of interest is much lower than credit cards and car loans. The second is that the interest is tax-deductible. But, it is a double-edged sword because it does reduce the equity in your home.
Hopefully, these strategies will help you to gradually improve your savings rate, reduce debt, and provide a more secure financial future.