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Wiles: Steps and missteps on the road to saving money

Russ Wiles
The Republic | azcentral.com

The nation's personal savings rate is sliding again, dropping to just 3.8% of disposable after-tax income as of June. That's not the lowest rate ever recorded by the Bureau of Economic Analysis, but it's close.

Many Americans clearly have trouble stashing away money. Here's a look at some tips that could help and some dangers to avoid:

The 50/15/5 rule

Recognizing that people find it difficult to stick to detailed budgets, Fidelity Investments has come up with another guideline. It's called the 50/15/5 rule. With it, you aim to spend no more than 50%  of your take-home income on essential expenses such as housing, transportation and food, while striving to save 15% of pre-tax income for retirement in a workplace 401(k) account (or similar plan) and at least 5% of take-home pay for emergencies.

That still leaves 30% of your income to spend in other ways, without trying to micromanage every penny. Fidelity said its researchers analyzed hundreds of scenarios to develop this guideline. It's similar to the 50/30/20 rule, which involves spending 50% on essential items, 30% for other expenses and 20% in savings, without specifying between retirement and an emergency fund.

For many, the biggest challenge would be keeping essential expenses to just half of your paycheck. In addition to housing, transportation and food, essential outlays might include property taxes, insurance, utilities, child care costs, debt payments and health care.

A 15% target for retirement savings is ambitious, but the amount can include employer matching funds, if any. Even if you can't start that high, save what you can and build it up gradually, Fidelity suggests. The goal of saving 5% for emergencies is to end up with a rainy-day fund capable of meeting six months of essential expenses. 


Different perspectives on savings

Sometimes, it helps to re-frame the savings challenge, to think of it in a different light. Among 54 savings tips discussed at Americasaves.org are a few that might help you look at savings in a new way.

For example, one tip suggests that you analyze a purchase not in terms of dollars spent but in terms of hours worked. For example, if you earn $15 an hour after taxes, you might think twice about paying for a week-long vacation requiring perhaps 100 hours of labor or a new vehicle costing the equivalent of 2,000 hours.

Another tip is to delay nonessential purchases for at least 24 hours, so that you minimize impulse buying. This can be easy to do if you use an online shopping website that allows you to save items on your list that you can go back and purchase later, if you want.

Americasaves, a program sponsored by the Consumer Federation of America,also provides other tips, some quite basic, such as sticking to water rather than more expensive beverages while dining at restaurants, setting up automatic-savings payroll deductions and designating at least one day each week as a no-spend day.

MyRa accounts on the way out

One savings vehicle that just didn't get the job done was the government-sponsored myRA account. The Treasury Department recently announced it will phase out myRAs and no longer accept new contributions, citing "extremely low" demand.

MyRAs debuted a few years ago with the aim of giving lower-income Americans a secure place to save. They came with no fees or minimum-balance requirements, while offering tax-free growth of earnings. But one problem was that the accounts mandated that savers invest in low-yielding Treasury bonds. The tax feature wasn't unique either, given the availability of Roth Individual Retirement Accounts (myRAs were a type of Roth IRA).

"Existing alternatives to the myRA were superior because they allowed workers to invest in a variety of securities, while the myRA restricted investments to U.S. Treasuries," noted the Institute for Policy Innovation in a commentary. "Treasuries are lousy retirement investments." 

Jovita Carranza, U.S. Treasurer, acknowledged as much in shutting down the program. "Ample private-sector solutions exist, which resulted in less appeal for myRA," she said in a recent statement. 

Clustered shocks

The key reason to amass emergency savings is to cushion the blow from possible shocks to your budget like a job loss or big medical bill. Sometimes, though, your rainy day fund might need to absorb the damage from multiple disruptions at the same time.

A study by The New School, commissioned by the National Endowment for Financial Education, found that nearly everyone is at risk of enduring occasional periods when income dries up and expenses balloon, whether from a job loss, health crisis, divorce or something else. Such budget disruptions often cluster together.

The study found that most people, at least occasionally, endure annual income declines of at least 10%. The researchers found that 96% of American men see their income drop at least that much on four or more occasions by the time they reach 70. Among men, three in five survey participants reported at least one episode where they had no job-related earnings for an entire year.

"This research shows that it is not a matter of if something will disrupt earnings, but when and how severe the effects of such shocks will be," said Ted Beck, president and CEO of the National Endowment for Financial Education.

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The most damaging consequences sometimes result from declining health, including long-term illness and work-limiting disability. But whatever the catalyst, people who must stop or curtail their employment often decimate their retirement accounts by permanently withdrawing funds, paying penalties and halting new contributions. Hence the importance of having emergency money on the side.

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.

Russ Wiles is a financial columnist for the Arizona Republic