Americans’ personal savings rate has risen in recent years, but it’s still far lower than it was 30 years ago. (In the 80’s it was close to 10%, currently it’s at 3.6% – which is pretty bad!)

The importance of saving a percentage of your income regularly (monthly) cannot be overestimated. Ideally it should be around 10%. Save more if you can. You will thank yourself later!

Unfortunately, most people live paycheck-to-paycheck and also, in our culture instant gratification and a “spend-baby-spend” mentality prevails, even beyond our means. One of the first things to save up for is an “emergency fund” which should be 6-9 months of your living expenses. After that’s in the bank, you can save for other short- and long-term goals.

To save up for near-term goals such as a vacation, a major appliance purchase (big screen TV, new fridge, new washing machine, etc.) funnel a little bit of cash toward your savings every paycheck. A financial advisor (the would be me!) can help you figure out how to maximize your savings options and present you with powerful “Time Value of Money” calculations, so you’re able to reach your short- and long-term goals. The power of “Time Value of Money” plays a significant role in building your savings because of compounding interest that you get paid on your money which is a huge contributor of savings.

There are two online savings accounts I would highly recommend: one is Ally Bank (www.ally.com) which currently offers the highest savings interest rate (and CDs,) and SmartyPig (www.smartypig.com) You can link an external bank and account to your separate Ally Bank savings account and make regular deposits online. SmartyPig is a unique savings program that was designed to help people save for specific goals. Goals may be funded with a monthly recurring contribution from your existing checking or savings account. You can also make one-time additions of money toward your goals and receive contributions from your friends and family members. SmartyPig is unlike your typical savings account! (I am not affiliated with either of these companies.)

To address longer-term goals, casting aside short-term wants and needs, have you considered that you, like most people, are not saving enough for retirement? If you are behind saving for retirement should you take more risks to catch up? The temptation is to try to ramp up your nest egg by investing more aggressively in stocks. However, there is no assurance that a sub-par decade will be followed by a superior one, so it’s a risky proposition. There are several ways to close the gap between where you are and where you’d like to be, the most effective of which is not to invest more aggressively but to save that way.

Check back often for more entries on various topics related to mastering your finances holistically.

So this is the case for saving and investing. In my opinion, and this is what I would recommend to my clients, any cash that is not used for your emergency fund (which nowadays should be around 6 to 9 months of your basic sustenance) should be either invested in an interest-bearing money market or savings account. More money, for longer term investing, should be invested in your investment portfolio.

If you’re saving up for a special expense or goal in the near future, that should be put into an account that is quickly accessible. However, anything beyond that should be put into investments. Hopefully, you have a brokerage account with an investment portfolio that you can add to (see about investment portfolios on the Financial Mastery website). Any significant amount of cash that you have left over should be used to add to this investment portfolio after you have taken care of your monthly bills, set aside money for your emergency fun, and contributed to your savings account.

Why? Because “money makes money.”

Check back often for more entries on various topics related to mastering your finances holistically.

My mission with Financial Mastery (www.fmastery.com), is to help people with their financial planning and wealth management holistically. I sincerely believe that financial planning should be taught in school … though if it was, I might  be out of a job !

So why Financial Planning?

As an example, let’s take the Wilson’s; an “average” family, their spending is not excessive,  but they are coming up short month after month because they don’t know where their money is going. Reaching a point where they really needed to make some changes, they decided to  track their daily expenses by running a simple spreadsheet (carrying a pen and small notebook and jotting down spending day-today works too), and at the end of the month found three or four areas where they could cut back spending or eliminate entirely.

This practice, or attitude, extends into general budgeting. When you know your income and can see your monthly expenses, you can begin to develop a financial plan, because now, just like with a garden, you will know your soil, and where you want to plant, and can therefore plan  for growth and exactly what you want to nurture.

A prudent financial plan will always include a plan for the worst. As a rule of thumb, this means having, at minimum, an emergency fund equalling 3 to 6 months of your yearly income. With the economy as it is nowadays, I recommend having 6 to 9 months of income available as cash or cash equivalents.

Many people don’t have disability or life insurance. In a family situation both of these are of vital importance. A lot of parents tend to gloss over this key part of their financial picture and it can be a huge mistake. When you have dependents it is crucial to think about what will happen if you become disabled due to an accident, or in a worst-case scenario: lose your life.

It is a well known fact that Americans are the worst savers in the world. Buying on credit is okay, but it needs to be kept in check. Saving for future expenses and goals is important,  and as part of that savings plan you should prioritize. The Wilson’s for example, have future college expenses to consider, as well as retirement; in addition, they are considering acquiring property, will shortly need to buy a new car and are saving up to take the family to Australia on a long promised vacation.

Just as you would divide up a garden, you should create “parcels” of savings, and contribute a percentage of your monthly income to each parcel in priority of importance.

These are just a few of the basics of responsible and prudent financial planning. Check back often for more entries on various topics related to mastering your finances holistically.