- Only 38% of Americans have emergency savings for an unexpected $500 to $1,000 event.
- About 30% of Americans have no money saved for retirement.
- The average American saves 5.8% of their disposable income, or income after taxes.
- As of 2014, sixty-five percent of Whites have some retirement savings compared to 15.3% of Blacks, 6.1% of Asians, and 2.9% of mixed and other races.
Savings: all income not spent.
Safety Net. There are several reasons to save. Since minorities are significant more likely than peers to experience financial hardship, I argued in Debt 1.0 that minorities build a 6-9 month safety net; ethnic minorities often take on the financial burdens of their parents and grandparents since these groups were not allowed traditional wealth building strategies in the past. My parents, who are fourth generation American, were the first generation of people in my family to gain access to a mortgage from a traditional, national bank; this was in the 1970s.
Retirement. Retirement is whatever you want it to be. Dream big and plan ahead. I don’t expect to work 60 hour work weeks in my 70s, but I do plan to continue working. I want to travel internationally for months at a time, and be able to support myself. The most common retirement savings accounts are 401Ks/403Bs and IRAs; 401Ks and 403Bs are offered through employers and IRAs are offered at most banks. Each retirement savings account has two options (some employers do not offer roth accounts): Traditional and Roth. Traditional accounts defer taxes until you began until retirement, while Roth account pay taxes now with no taxes at retirement.
General/Other Investing. Home ownership is the quickest way to build wealth. For the traditional home loan (mortgage), banks prefer that you have a down payment of 20%. There are ways to get around the 20%, but an additional insurance, called private mortgage insurance (PMI), is required for a down payment less than 20%. The Federal Housing Administration (FHA) only requires a 3.5% down payment, but other stipulations are required. Your down payment, like most loans, is mostly dependent on your income and credit history; a bigger down payment is ALWAYS better.
Children’s education, particularly college, is stupid expensive. Market speculators think that America is headed into a Student Loan Bubble/Crisis because student loans have become such a burden to millennials, causing a delay in home ownership and a number of other wealth building tactics that young adults typically explore and invest in. As I stated in Debt 1.0, “[t]hirty percent of Millennials would sell an organ to get rid of student loans.”
There is always a reason to save. Outside of a small emergency savings ($2,000), I don’t recommend saving before clearing up small debts. After small debts have been paid, I recommend a 6-9 month emergency fund and then saving for whatever short-term and long-term goals that you have. The 6-9 month emergency fund should be liquid, or easily available for use.
Measuring Your Improvement
- Paying all of your bills on time
- Minimizing your debt
- Contributing to your long-term goals each month
- Allowing for money to meet some of your short-term goals 3-4 times a year
Saving is the road to wealth building. I believe that having a cushion, particularly as a minority, can provide significant peace of mind. Similar to debt reduction, a robust savings account allows you to think with a clear head, giving you the opportunity to evaluate career and life goals in a different way. Typically, you can create a 6-9 month savings account in less than 1 year.
Reach out to me at TheLucesco@gmail.com if you have more specific questions. Happy to share information on how to build a budget, kill your debt, or create a savings strategy.