With all the demands of daily life, it can be all too easy to neglect to plan for your financial future. Failing to plan for your financial future can have catastrophic consequences. Sitting down and planning for the future might seem like a daunting prospect, but it pales in comparison to the consequences of what might happen if action is not taking.
What is the average American saving?
Your financial plan will depend on many personal factors such as how much you currently earn, where you are living and what your plans for the future might be. While financial planning is unique to the individual making the plan, it can be helpful to have a little background information before you begin.
If you struggle to plan for your financial future, you are not alone. A recent survey by ING found that 27% of Americans have no savings whatsoever. The average rate of savings in America, however, might surprise you. Data from the Federal Reserve and the Federal Deposit Insurance Corporation report that Americans had an average of $183,200 in savings in June 2019. This large figure has been drastically impacted by high-income households and should not be seen as an accurate representation of what most families have in their savings. Across all households, 69% of American adults have less than $1,000 in savings.
The available data do not give a particularly clear indication about the most common amount saved in America but it does make one thing very clear: most American households are struggling to save for the future.
Why is it important to save for the future?
While most people can provide an answer to the above question, taking some time to consider the implications is often a very good motivator for financial planning. The list below outlines some of the reasons why it is so important to save for the future.
An emergency fund
Your emergency fund is there to be used when you incur any unexpected expenses. The 2019 Bankrate survey found that only 18% of the Americas could live off their savings for six months. A further 40% would need to borrow money to cover an emergency cost of $1,000 or more. Your emergency fund might be used to cover anything from hospital bills to rent. The ideal amount in your emergency fund should be enough to cover three to six months of expenses.
Saving for retirement
Another reason that you need to start planning for your financial future is to set up a retirement fund. People who fail to start a retirement fund early enough find themselves having to work longer and spend less later in life.
When you save for your retirement, you deposit the money into a dedicated account such as a 401(k). The money deposited in a retirement account will appreciate in value as interest is earned. The amount of interest earned will depend on the amount of money you have in your account, as well as the market.
Saving to earn money
Another benefit of saving money early is to maximize the amount of interest you earn. Some of the best places to earn interest include a regular savings account, money market account, high-yield savings account, savings bond or a certificate of deposit.
How to make a financial plan
Once you understand how important it is to plan for your financial future, it is time to start organizing. Although it might at first seem like an overwhelming task, breaking down financial planning into step by step tasks can make it much easier.
Think about your future lifestyle
The first step to consider when planning for your future is to think about what your desired future lifestyle looks like. Without a clear idea of what your future will entail, you will not be in a position to acutely determine how much you should be saving. When you consider your future life, you should ask yourself questions like: Do you plan on having children? Where do you plan on living? What age do you plan on retiring? Once you have determined what your future will look like, the next step is to work out how much it will cost. You should try to come up with a figure for your average predicted monthly expenditure. In addition, you should have an annual figure that will include any extra spending such as holidays. Use this calculator to work how much money you will need to save for your future goals.
Set a budget and stick to it
Once you have realized how much money you will need in the future, it is time to come up with a budget. One way to set a budget is to work out how much money you will need, or how much you can afford to save each month. Try and make your budget as detailed as possible, giving yourself limits for each category of expenditure such as groceries and clothes shopping.
Seek financial help
There are many reasons that people seek financial advice; they might be struggling to stick to their budget, or they could be looking to ensure they are getting the most out of their savings. Whatever your specific motivations might be, seeking wealth advising with a comprehensive approach is sure to benefit your financial future.
Track your progress
Although it is important to set a budget and stick to it, it doesn’t mean revisiting your financial plan isn’t a useful exercise. Taking the time to revisit your financial plan after about six months of sticking to a budget can be very informative. After six months have passed, you will be in the perfect position to identify areas where you can further cut back on spending.
How to start saving
Once you have a plan in place it is time to start saving. Saving money doesn’t have to be a long and painstaking process. Below are some ways to quickly and easily save for the future.
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Direct deposit
Ask your employer to send a portion of your paycheck directly into your savings account.
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Automatic transfers
If you are unable to have part of your paycheck sent directly from your employer to your savings account you can always set up an automatic transfer. Every month you can arrange to have money sent from your checking account to your savings account.
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Use a budgeting app
There are many apps on the market that have been designed to make budgeting and saving as easy as possible. Applications like Mint, YNAB and Yodlee’s MoneyCenter help you to keep track of your spending to enable you to easily identify areas where you can cut back.
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Save your raise
If you have recently got a raise at work why not put the extra money you are making into a savings account? Then consider saving it regularly instead of spending it.
