Control your money
Direct your money
You should save a cash cushion of 3 months salary to cover emergency costs, but many people have zero savings.
Across USA the amount which people typically save has declined over past 20 years from 9% to 2% of monthly salary.
2016 Survey by Barclays reported:
52% of prospective homeowners, who aspire to buy their first property in the next three years, are currently not saving any money for a house deposit.
59% of people planning to get married within next three years are not saving any money for their wedding.
70% of people who want their first child within next three years are not saving and money to cover additional costs associated with caring for a baby.
There are many financial products such as: Mutual Funds, Tracker Bonds, Savings Bonds, Individual Savings Account (ISA), Individual Retirement Accounts (IRA), 401K Retirement Plan and 529 Education Savings Account which can help you save in a tax efficient manner and help your savings grow by earning a return on your investment.
As the Owner of your Savings it is your personal responsibility to make some Investment decisions about how your Savings are managed.
You need to invest time, before you invest your money,so you understand the menu of choices available and choose the best financial product for you.
To make an informed decision, you need to understand the criteria by which you should judge a Financial Product.
Pensions Time bomb
First challenge is that life expectancy for most people is 10 years longer than their parents generation. Thus the amount of savings required to pay living costs, housing costs and medical costs during a long retirement period is increasing.
Second challenge is that because of global economic problems typical Interest Rates have fallen from 4% to 1% and returns on Stock Markets have declined.
Pensions Fund Managers are finding it very difficult to generate a high return on investments, and many pension funds are not growing fast enough.
Third challenge is that because many Governments, many Companies and many Individuals are not saving enough money now to cover future pension liabilities, many Pension Schemes are underfunded and will not have enough money to meet future liabilities.
Short Term 1-3 Years
A Bank Current Account is useful to receive in money and to make payments out by Debit Card, Online electronic transfer, Cheque or Cash. Money in current account is instantly accessible so there is a big temptation to spend it on impulse purchases. If you are serious about Saving then you should set up a Savings Account.
Many people say they have no money to save, but around 20% of people waste money on Cigarettes.
Analyse where your money goes and perhaps you spend around US$100 per week or US$5,000 per year on your Social Life including Coffee, Restaurants, Drinks, and Entertainment.
Many people waste money by paying high Credit Card interest and by not claiming tax allowances. It is possible that you could put 20% of your salary into your Savings Account, if you work overtime to earn 10% more and you waste 10% less by being careful about what you spend.
If you want the Car, the Wedding and a place to live or perhaps start your own Business, then you need to make effort to put some money aside each month in to a separate Savings Account or Savings Bond at your Bank, Credit Union or Building Society.
Savings Accounts usually pay some interest on the money in the account , and if you commit to leaving you savings in the account for between 12 months and 36 months, you may earn higher interest.
Savings Accounts are useful for short term 1 to 3 years but to save over medium and long term, you should invest your money in Financial Products which qualify for Tax Allowances and Employer contributions.
Just by showing that you have track record of saving regular monthly amounts, can be helpful in establishing a Credit Score.
If you can show your Bank that you are a credit worthy person capable of saving a loan deposit and making monthly loan repayments, the Bank are more likely to give you a Loan for a big purchase such as a Car or House Mortgage.
Medium Term 3-10 Years
If you are moving jobs and can not commit to living in one location for more than five years, it is probably more cost effective to rent a place to live. Buying a house only makes financial sense if you are planning to live in the house for more than five years.
Many people seek to save 20% of House or Apartment price and get an 80% Mortgage Loan.
Buying a house is usually a good investment as with each mortgage repayment the net equity which you own in the house increases. Potentially the asset value of the House may also increase.
House and Apartment prices in most countries are expensive and it is hard for most single people to afford to buy a house based on a single income. Many couples or perhaps two friends or two siblings work together to save money for a house or apartment deposit and use their joint income to qualify for a Mortgage.
The interest rate cost of borrowing money for a Mortgage over 25 years is around 4% to 6% per year. Rather than put spare cash in to savings or investments to earn less than 4% return, many home owners choose to use any spare cash to pay down their expensive mortgage debt as quickly as possible. If you choose a Variable Interest Rate Mortgage your monthly repayments could increase if interest rates rise. If you choose a Fixed Rate Mortgage, your monthly repayments are fixed at a set level for an initial period of 3 years or 5 years or longer.
If your ability to earn an income is affected by unemployment, serious illness or if you die unexpectedly, then either you or your family make suffer severe financial hardship. Thus it is prudent to protect against these risks by taking out Income Insurance and Life Assurance.
Medium Term Savings Schemes are usually for 7 to 10 years.Long Term Savings Schemes such as Pensions Funds will usually not permit the Saver to withdraw money until age 65, and may charge saver a penalty if they seek to withdraw money early. You need to understand your time lines about when you need the money back.
Governments usually give Tax Allowances so savers can put gross pre-tax income in to a savings account. Many Employers have schemes by which the Company will contribute a matching payment of around 3% of salary or more, in to a Savings Scheme or Retirement Fund.
Long Term 10-40 Years
If you do not save and invest around 15% of your annual salary, each year over a 30 year career period, you are very unlikely to have enough money saved to pay you a pension, which you can live on during a 30 year retirement period.
During your career you can save in to
a Pension Fund. You may be covered by a Company Pension Fund managed by your Employer and you may have a 401K
Personal Pension Fund which you manage, or you may have both .
But once you reach retirement age of 62 or 65, then you have to make a vital strategic choice. Either you choose take your
Pension Fund at retirement age and you manage it yourself and live on the pension fund for the rest of your life. You may die young at 66 or perhaps you will live for next 20 years to age 86 , or next 30 years to 96.
Or alternatively at retirement age of 62 – 65 , you can choose to insure against risk that your pension will run out before you die , by purchasing a Retirement Annuity
By way of example, if you have a Pension Fund of US$200,000 at retirement age, you can buy a Fixed Annuity which will typically give you a 5% yeild or US$10,000 fixed income every year for the rest of your life, no matter whether you live for next 4 years or next 40 years.
Some Annuities are for Single Life which means that once you die, then your Annuity Income ceases. This could be a problem as you surviving spouse or partner may then have no source of annual income.
It is possible to buy a Joint Life annuity, so if husband dies, then annuity will continue to pay income to wife or partner for rest of their lifetime.
Potential problem with a Fixed Income Annuity is that over time, price inflation will reduce the buying power of your income.
There are more sophisticated Performance Annuities such as a Unit Linked Annuity, which commit to providing a basic minimum level of fixed annual income plus additional annual top up income depending on how the the level of return on investment which the Units generate.