In mastering the defense of wealth preservation, we talked about the why––why you need to be putting away money regularly for savings. We also talked about the where––where you should be putting that savings once you have decided to put away a certain amount per month.
Today I wanted to jump into how much you should be putting away––how much you should be allocating to those savings accounts on a regular basis.
Exposure
When trying to figure out how much you should be saving, often I recommend that people look at their exposure––the amount of exposure that they have in the event of a layoff, in the event of a job loss of some kind, or some medical emergency, and seeing how impactful a period of time where there is no income coming in would be on their personal finances. Often, you may have someone single who has lower exposure than someone who has a family because of the costs of that household and maintaining those lifestyles. With that, you\’ll have to look at your personal finances and see how much exposure you have and how much risk you have in the event of going for some time without income.
In the most recent report by the Federal Reserve bank of St. Louis, they told us that Americans have a savings rate of about 13.7%.
This is abnormal, considering the volatility of last year\’s rate. But what that tells us is that people are saving more than they typically do. I assume that this will level back out, and we will continue to see a leveling off of savings as we move on, barring any other significant events occurring, of course. But with that, people are not really saving a great deal of their income. They are not necessarily putting away money for a rainy day fund on a regular basis.
So with that, they may be saving more during this time because it\’s a little bit more volatile. But when you are looking at the trajectory–when you are looking at the history of people\’s savings rates–they\’re not very impressive. And oftentimes, unfortunately, people don\’t have much in savings to cover any kind of unexpected event, like a health event, job layoff, or job loss of some sort. The typical savings rate that I see recommended regularly is between 10% to 15%. However, it may not be enough based on your income level––based on your costs in regards to your living expenses––but at least it gives you a starting point per se.
I recommend that you look at this by looking at your plan to spend, then looking at your budget, and then seeing how much leeway you have in your budget as it sits right now. Also, find the difference between what is coming in as your income and going back out as your expenses.
Now, there are other movements that push for higher levels of savings rates. One of which is FIRE (Financial Independence Retire Early). Many of those participants save 60% to 70% of their incomes, but they\’ve also structured their plan to spend to accomplish that. But what you need to figure out is your level of exposure first and foremost. Then, moving on from your level of exposure and knowing how much that is, ask yourself, \”Okay. Well, how much should I be saving? And how do I need to adjust my budget accordingly?\”
Step 1
Now I believe step one for most people is to set aside about $500 for an emergency fund. Now, that\’s only a starting point. As you build up that savings, it\’ll turn into a rainy day fund of sorts, which will cover your baseline expenses in the event of a job loss, a health issue, or something like that. But this is a good starting point, and usually, it\’s a lot easier for people to obtain $500 by selling something or building it into their budget over a certain number of months. But you need to have that savings, at least from a starting point, to get that momentum rolling.
This rainy day fund should be set aside so that it\’s out of reach, out of sight, and out of mind to protect it from your everyday operating account. Whatever account you use your debit card or pull cash out of regularly, you\’ll want it to be separate from that rainy day fund so that you won\’t be tempted to use that for something that may not be categorized as an emergency.
With that, it\’s essential to try to find some account that is at least protecting you to some degree against inflation.
According to Kiplinger, inflation this year is set at about 2.2%. That means that if you had $100 at the beginning of this year, that money would only go as far as to cover 98% of what it first covered. So with that, you\’ll want to be mindful about trying to utilize a savings account that at least keeps up with inflation. This is challenging in this day and age because money market accounts, high yield savings accounts, and typical savings accounts are not returning a great deal. But it\’s important for you to look at this money not as an instrument for growth but as an instrument to defend you––protecting you against risk.
If you\’re not familiar with what inflation is, Webster defines inflation as \”a continuing rise in the general price level, usually associated to an increase in the volume of money and credit relative to available goods and services.\” When there\’s more currency, it doesn\’t go as far. And so, over time, you can buy fewer things with the same amount of currency as you once were able to.
Now, this is a regular occurrence. If you look at history or a historical reference, you can see many products that have gone up in cost over time.
Step 2
I believe step two comes down to saving $1,000 in that savings account––that rainy day fund. Now, this is an amount that Dave Ramsey and his group commonly recommend, and it\’s a good starting point to cover those $400 or $1,000 expenses that many people have to go into debt to cover.
