By Victor Freedman
Americans are terrible at saving money and we’re getting worse. In 2005, for the first time in the nation’s history, Americans’ personal savings went into negative territory: That year, according to the Bureau of Economic Analysis (www.bea.gov), we had more than $9 trillion in disposable (after-tax) income, but we spent all of it and owed almost $35 billion on top of it. In 2006, the amount we owed grew to $102 billion. In 1981, Americans saved 13.5% of our total disposable income. By 2006, our personal saving rate had sunk to -1.1%.
How do you save in an economy that is hungry for your hard-earned cash and then some?
The best way to save money is to gear it toward what you want to do with your savings. If you are saving for retirement, think long-term. With life spans increasing, retirement will likely last a long time. A savings plan geared toward retirement should be invested where it’s safe enough so that if the bottom falls out, you don’t lose the time and money you put into your investment.
You can invest in risky things with a high rate of return, or put your money in conservative areas which have lower rates of return on the dollar, but are safer with less risk for your retirement fund. Some retirement/savings plans are like insurance policies in that they are guaranteed to never lose more than you first put into the plan, in essence, insuring that you can’t lose money. The principal investment is always there!
Deciding how much to put into a savings/retirement plan is based on what you can comfortably afford, whether on a monthly, quarterly, semiannual or annual basis. The money you place in the account grows on a tax-deferred basis, which then becomes taxable when you withdraw funds to help pay for retirement or whatever use you intend for them.
For a person with a disability the plan can be the same as for a person without a disability. Again, the thing to remember is that a savings or retirement plan is a long-term commitment, and people with disabilities might want the fruits of their investments on a quicker basis. But, it’s important to remember that savings and/or retirement plans don’t mature overnight.
The safest way to save money is to put it in a savings account in the bank, don’t touch it, and add to it as you can. This method is slow and steady. It isn’t, however, for everyone. Deciding to save money means you have to make up your mind how much you want to save, for how long, what risks you’re willing to take, and exactly what you want to get out of it.
An annuity is a tax-deferred savings plan, usually for retirement or some other distant expensive event, such as college for a child. Annuities typically require at least seven to ten years before they become profitable, which means they also require patience.
They typically are divided into two phases, one for “accumulation” and one for paying out. Withdrawing during the accumulation phase can result in your paying, not only taxes on the amount, but also steep penalties called a surrender charge-which defeats the purpose of having a savings account in the first place. If you have a little extra money to spare and know you will need more many years down the road, annuities are a good option. They are not usually a good option if you are already retired, unless you invest them for someone else’s benefit. They can be found at a bank, an insurance agent, or with a financial planner.
An Individual Retirement Account (IRA) is a form of annuity or investment portfolio, and a good one for anyone with limited resources and a little patience. You can invest as little as $20 per month, and as long you don’t withdraw funds prematurely, you won’t pay taxes on it and may even qualify to deduct what you invest from your taxes. Be careful, though, because not all IRAs are tax deductible. Roth IRAs, in particular, are not deductible.
With online trading and the popularity of 401(k)s and other investment-based pension plans, the stock market has become a popular venue for people to try their own hand at making their money grow. But you should remember that playing the market is literally a gamble. The odds of winning something are vastly greater than they would be if you invested only in lottery tickets, but your odds of losing your entire investment are also vastly higher than if you left it in a piggy bank.
I would not recommend trying to save money with the stock market unless you have savings in a less risky place if something goes wrong-and remember that things can and do go wrong. If you are able to supplement another savings plan and have the time to stay informed enough to do your own trading, more power to you. Most of us, however, have neither the time, money, nor tolerance for risk necessary to trade on our own. For the average would-be investor, it is much more important to invest your time in finding a broker you trust.
The best place to get more information about any of these methods of saving is your local bank, which may offer financial planning at no extra charge. Or you could talk to an independent financial planner.
Victor Freedman, a United Spinal member, is an insurance agent and a financial planner. Call 860-246-4519 or e-mail insurancebyvic@yahoo.com.
