I was recently at a financial planning conference hosted by the Garrett Planning Network. It provoked many ideas about the constructs we each have when it comes to our financial lives. I reflected on the deeper psychology around many of our financial decisions, particularly savings.
Saving money is the single most important thing you can do to prepare for retirement. This is a powerful concept. We’re often tempted to believe that market returns or flashy strategies will have the greatest impact. However, that is not the case. According to the Putnam Research Institute and their study titled, Defined contribution plans: Missing the forest for the trees?, “Putting fund performance front and center is an error with far-reaching implications. That is not to say that fund performance does not matter, but our analysis suggests it is a much less powerful variable compared with asset allocation and, most of all, higher deferral rates.” If all other factors are equal, deferral rates alone have a profound impact. They go on to say, “As we dial up the individual’s contribution from 3% of income to 4%, 6%, and 8%, the final balance after 31 years jumps from $205,551 to $274,067, $411,101, and $503,501, respectively.”
Okay, maybe this is a little bit of a stretch. Perhaps it’s not sex appeal exactly. However, I believe one may have more confidence (which is sexy) and peace of mind knowing they have money set aside for important life goals and potential emergencies. I often emphasized the importance of an emergency fund and this is no exception. I’d also like to introduce the concept of “smoothing out” savings. In financial planner’s speak this is a “cash flow management strategy.” In addition to retirement savings, mentioned above, open a savings account for predictable and periodic expenses. This account is for things like vacations, cars, computers and new mattresses etc. This way you can simply glance at the account balance and know how much money you have for a given item. Additionally, when these expenses arise, they are affordable and don’t require you to dip into emergency savings or put them on a credit card.
Saving in and of itself has very little meaning. The idea is not to be greedy with our money. That is not the point of saving. Instead, we want to be purposeful with our money. Oftentimes this means delayed gratification and accumulating funds until we can afford a meaningful purchase. Greed can also manifests itself in a focus on market returns instead of the needed funds to accomplish a goal. I hear many people boast about the return of a specific investment. Although high returns are not a bad thing they don’t give us purpose or satisfaction in another themselves. Avoid being greedy by creating meaningful goals.
Not only is savings the most powerful retirement tool, it will also give you peace of mind and confidence while you accomplish your most important life goals. I hope this post is a reminder of the fundamental importance of savings and motivates you to continue to SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.