By: Kelsey McCarty
The Complexities Between Saving and Spending
For many Americans, saving for the future can seem daunting with the current cost of goods, personal debt, and the likelihood that many Americans will outlive generations before us. According to a Federal Reserve study in 2022, the typical American has $8,000 in their bank account. This encompasses savings, checking, money market, and CD accounts. Just 45% of Americans could cover a $400 emergency expense without using a credit card, using funds only from their checking or savings accounts.
From the 1970s to the financial crisis in 2008, saving rates declined in the US and remained relatively stable until the onset of the pandemic in 2020 when savings skyrocketed to nearly 25%, a savings rate never seen before. Unfortunately, by 2022 the personal savings rate of Americans had fallen to the second lowest rate in history, 3.31%.
These conditions are compounded by the fact that pension plan participation has decreased dramatically in the last 35 years from a high of ~34 million participants to a low of ~12 million in 2020. This transfers the risk associated with retirement income preparedness back to the American consumer as pension plans used to be the foundation of a retirement plan. According to the Federal Reserve, 46% of Americans don’t have a retirement account.
The Journal of Financial Planning recently conducted a study in which they theorized that those with greater financial knowledge of savings and investing concepts had higher savings rates compared to those without. However, what the researchers realized is that the key wasn’t simply having the financial knowledge, rather those households setting financial rules for themselves had higher savings rates than others, regardless of financial knowledge. It's not enough to know financial concepts if they are never applied to your life.
Recommended Rules
A 10% savings rate is a good place to start. Regardless of income level, saving 10% of your income per year over 40 years (for instance, ages 20-60) yields 15x-16x your original income assuming a 6% rate of return. For example, an individual making $100,000 per year in income with a 10% savings rate ($10,000) would have $1,547,000 after 40 years of savings (again, assuming a 6% rate of return); 15.4x the original income level. Likewise, an individual making $40,000 per year with a 10% savings rate ($4,000 per year) would have $619,000 or 15.4x the original income level.
If you can’t save 10% right now, could you save 9% or 8%? Try to, at minimum set aside 5% of your income and work your way to 10% or higher as your budget allows. Once you find a percentage that you can set aside; make a rule that when you get paid, your first step will be to transfer that percentage into savings.
*This is a hypothetical example for illustration purpose only and does not represent an actual investment. Actual investor results will vary.
Order of Operations
If you think back to middle school, you probably learned the order of operations. In finance, there is an order of operations to best help you save for the future.
1. Emergency Fund
An emergency fund is great place to start saving. Surprise expenses shouldn’t ruin your finances. Creating an account (typically a savings account) with 3-6 months of expenses is a great way to reduce your risk that a surprise expense with disrupt your financial plan.
2. Give to an Employer-Sponsored Retirement Plan
Make sure you are taking advantage of your employer-sponsored retirement plan. This could be a 401K, Simple IRA, 403b, etc. At the least, try to contribute the amount your employer will “match”**. Many plans offer a 3-4% match, which means that the employer contributes additional money on your behalf each time you contribute money (with a maximum “match” based on a percentage of your income; 3-4% is common).
**Matching contributions from your employer may be subject to a vesting schedule.
#3(a) and #3(b) could be interchangeable depending in your liquidity needs. Once steps 1 and 2 are completed, it may be wise to discuss your specific needs with a financial advisor.
3(a). Max out a Roth or Traditional IRA
If liquidity needs aren’t a top concern (e.g. saving for a home purchase, car purchase, etc), then you may want to save more for retirement. Roth IRAs and Traditional IRAs are great options with different tax benefits for each. We recommend having a discussion with your advisor or CPA to determine which is more appropriate for your situation. For 2025, the maximum contribution for IRAs is $7,000 for those under 50 and $8,000 for those over 50.
3(b). Contribute to a Taxable Brokerage Account or Contribute the Maximum to your Employer Sponsored Plan
If you have specific mid-to-long-term goals (home, car, etc.), then you may be wise to direct additional savings into a brokerage account. Much like a savings account at the bank, the funds are liquid and accessible without penalty as needed.
Alternatively, if you’d like to increase your retirement savings, or receive income tax breaks, adding more to your employer-sponsored plan could be a good alternative even if you don’t get any additional “match” from your employer.
The ultimate takeaway is to develop a plan for saving. Establishing financial rules such as saving 10% of your income each month may prove to be a fruitful decision. January is a good month to start. Your future self will thank you.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please consult with your financial advisor for more information. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Kelsey McCarty and not necessarily those of Raymond James.