Start saving!

April 18th, 2007  |  Published in Consumerism, Finances, Life  |  5 Comments

According to recent polls, 40% of workers are not saving for retirement and 25% percent of workers say they have no savings at all (source).

That means 1 out of every 4 people in America do not have savings. Solomon has a proverb for this. He tells the sluggard (or "lazy fool" in a paraphrase) to "go to the ant" and watch how "she prepares her bread in summer and gathers her food in harvest" (see Proverbs 6). The wise store up for hard times.

We must plan for the future. Instead of buying gadgets and getting into debt, we should be putting money aside so we do not become a burden on family and society. In fact, if everyone saved responsibly there would be little need for social security. (Perhaps one day I’ll write up my idea for how to eliminate social security and replace it with a stable, decentralized system.)

If you are not saving for emergencies and retirement, it’s simple to remedy. Here are some action steps:

  1. Open an IRA with your employer.
    1. Put as much as you can into it with each paycheck. Most employers will match up to a percentage of your income (usually anywhere from 3% to 5%). Did you catch that? You double your money the first day!
    2. Whatever you put into an IRA can be deducted from your income taxes and you don’t pay taxes on gains and dividends. It sounds too good to be true, doesn’t it? So why aren’t you doing it?
    3. If you are self-employed or work for an employer that does not offer IRAs, you can open your own and get the tax benefits.
  2. Open a high-yield savings account. I use ING Direct.
    1. This is your reserve account and should build up each month. The money is there for when something goes wrong — like your water heater explodes or Rover needs heart surgery.
    2. Setup an automatic monthly transfer from your checking account to your savings account. If you’re working full time, this should be at least $100.
    3. Don’t use your savings account for anything other than (1) emergency purchases or, occasionally, (2) making more money. But if you use it to make more money, always replace what you took out as soon as possible.
    4. The goal is to have — on top of your emergency reserve — six months to a year of living expenses covered in your savings. If you lose your job then there should be enough to live comfortably while you find a new job. (Or to finance that small business you’ve always wanted to start.)

That’s it. Now watch it grow, save on taxes and feel a little more like a wise man than a "lazy fool."

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  1. Philipp Keller says:

    April 19th, 2007 at 2:59 am (#)

    Hi Josh.

    Thanks for this post. I would be very interested in your thoughts about this decentralized security system.

    In Switzerland there are three “pillars” each person has for his old-age provision.
    The money you put into your first pillar is mandatory: actually it isn’t for yourself but for the people that are now retired. This pillar doesn’t really work because there are more and more old people and of the young people nobody is really believing that he will get something out of that pot once he is retired.

    Than there’s the second pillar which is the IRA you described. But again this is mandatory, but just for those which work. For every employer the percentage of the IRA is set and the employee doesn’t have a right to change. So there are employers that put more into the IRA and those that don’t spend so much into IRA.

    Then there’s the third pillar which is completely voluntary. We can also get tax benefits for money put into this pot plus we can use this money to start a company or to build a house.

    Now my question: How are things different in the US? What I often heard and find very pleasing is that you guys are not obliged to do anything. That is you can look for ourself whereas in Switzerland we are forced to save our money in a particular manner (also health insurance is mandatory) and I don’t really like that as people again are not “trained” to be self dependent.

  2. clonic says:

    April 19th, 2007 at 7:21 am (#)

    In Singapore, it’s a “three-pillar” thing too. The first pillar can be withdrawn to pay for your housing, the second pillar can be withdrawn to pay your medical fees. The third pillar can only be withdrawn at retirement age.

    For health insurance, money is automatically deducted from your “second pillar” account to pay for health insurance. If you don’t want health insurance, you can always choose to opt-out. But since most people are apathetic, and don’t really mind the cheap insurance, very few bother to opt-out.

  3. Josh Sowin says:

    April 19th, 2007 at 9:58 am (#)

    Hi Philipp,

    Thanks for the interesting overview of Switzerland’s pillar system! I didn’t know about that.

    The US uses social security, which is taken out of all worker’s checks. This money is used to pay for those who are already retired, although the money is supposed to be for you. But the system doesn’t work. Many (most?) people take more than they put in — thus the widely held view that the system will collapse soon if the government doesn’t change something. When you retire you start getting monthly (?) checks from the government that is supposed to supplement an IRA or pension.

    There is also medical insurance (medicare) that we pay for in our checks, but we don’t get it until we retire. I’m not too sure how that works; I only know I pay for it.

    As for IRA or medical insurance, we are not required to do that. Employers usually provide medical insurance (or pay for half of it) and some kind of IRA benefits. Larger companies provide pensions to certain workers, but that seems to becoming rare.

    Josh

  4. Travis Seitler says:

    May 4th, 2007 at 11:56 am (#)

    Josh,

    I just wanted to point out an observation I had. Specifically, this post implies that:
    a) your audience is presently capable of meeting all of their existing financial obligations (providing for their families, giving) while still setting some aside; and
    b) charging usury (that’s how you accrue interest with a savings account) is commendable.

    Just wanted to point out that there’s many reasons for not doing these things… and not all motivations imply you’re being like the “lazy fool.”

  5. Josh Sowin says:

    May 4th, 2007 at 12:15 pm (#)

    Good points, Travis. Obviously people should pay off debts first.

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