| Late last year, something happened in this country that had not occurred since 1933: The nation’s personal savings rate went negative. And we don’t even have much company in our spendthrift ways: Our savings rate was the lowest in the industrialized world, according to the Organization for Economic Co-Operation and Development.
What’s behind this lack of savings? Many factors are involved, but some experts say that last year’s extreme situation was caused, in part, by skyrocketing housing prices. Apparently, as home values have increased rapidly, homeowners have felt more comfortable spending money, assuming that, if they ever need to, they can tap into the equity of their homes.
But this is not a good idea. While the housing market has indeed been hot in recent years, it can, and will, cool down. And in any case, it’s risky to depend on your home equity to help meet your financial needs.
How can you increase your savings? Consider taking the following steps:
Build an emergency fund. Try to put away six to 12 months’ worth of living expenses in a liquid vehicle, such as a money market account, to pay for household emergencies. By having these funds readily available, you won’t be forced to dip into your savings or run up big credit card bills. However, you may find it hard to set aside money for your emergency fund after you’ve paid all the monthly bills. That’s why you might want to establish a bank authorization to automatically move some money – even $50 a month, for starters – from your checking or savings account into a money market account. It’s painless, you won’t miss the money, and you will be surprised at how much you can accumulate over time.
Boost your 401(k) contributions. Are you putting in as much as you can afford to your 401(k) or other employer-sponsored plan? At the very least, contribute as much as necessary to earn a matching contribution from your employer, if one is offered. This type of plan typically offers tax-deferred growth of earnings and the ability to make pre-tax contributions that can lower your annual taxable income. And you may be able to spread your contributions among 10 or more investment accounts within your 401(k), so you can help diversify your retirement savings.
Open an IRA. In most cases, you can contribute to both a 401(k)-type plan and an IRA in the same year. If you don’t already have a traditional or Roth IRA, consider opening one – because it’s almost impossible to save “too much” for retirement. A traditional IRA offers tax-deferred growth of earnings, while Roth IRA earnings grow tax free (provided you are at least age 59-1/2 when you start taking withdrawals, and you’ve held your account at least five years). And you can fund either type of IRA with virtually any investment you choose.
By following these basic suggestions, you’ll help yourself make progress toward your financial goals – and you’ll be doing your part to reverse those terrible savings statistics. |
