Feed the Pig

As we approach the end of the year, it’s common for us to sit down and do some tax planning.  In previous posts we’ve discussed a bit of planning specifically related to the new health care legislation.  However, I think this is also a natural time to do an overall financial check-up.  Like many things in life, it’s easy to get bogged down in the day to day and sometimes overlook the long term.  Well, just like it’s important to do an annual medical physical, it’s also important to do a financial fitness check-up.  Over the next couple of posts, we’ll talk about some general things to consider in evaluating your overall financial fitness, and making sure your goals are in line for long term success.  Today, we’re going to talk about savings.

Over the last 20-30 years, there has been a dramatic shift in retirement philosophy.  Company retirement plans have shifted from defined benefit to defined contribution.  We do tax returns for clients now that have a military pension, state retirement, and social security all at once.  They know exactly what their income will be from year to year, and planning is relatively easy.  More and more often, though, people are getting to retirement not with a set pension for the rest of their life, but rather a pool of money that needs to be strategically invested and utilized to last them through their retirement years.  In other words, for many of us, the onus is on us to make sure we’re prepared for retirement.  Unfortunately, the statistics regarding retirement preparation are very sobering.

The American Institute of Certified Public Accountants (AICPA) looked at a study of new professionals aged 25-34 in the mid 2000s, and the statistics were alarming.  The study they commissioned was highlighted by the following:

  • Between 1985-2005, Americans 25-34 saw savings drop from 1.5% of disposable income to a negative 2.2%.  This means the average person 25-34 was actually spending more than they made.
  • This same group carried 70 cents of debt for every dollar of assets.
  • Non-household debt over this time period almost doubled.

As a response, the AICPA launched their “Feed the Pig” initiative at www.feedthepig.org. The site features a number of podcasts and articles detailing small things people can do in their day to day lives to cut spending and encourage saving.  A centerpiece of the site is the 5% challenge.  This page features an interactive savings tool that shows how much can be accumulated over time by just committing to save 1, 3, or 5% of income each paycheck.

If nothing else, he may scare you into saving

If nothing else, he may scare you into saving

Savings is an important part of your overall financial fitness.  It lessens reliance on credit cards and other forms of debt, and for younger people especially will become a much more important leg in the stool of retirement.  Take a few minutes to look at your household budget now.  Can you make a commitment to a savings plan today?  Like the proverbial apple a day, modest planning now will make for better options and an easier path in the future.