The Importance of Savings
“Savings may not have an immediate return on investment, but it is an ammunition for opportunity and future investments.”
What many people do not realize is the power of savings. Back in the 60’s to late 70s, many families were saving. These savings led to huge investments in technology, infrastructure, education, factories, real estate, and other mechanisms that fueled the growth of the American economy.
As you can see on the chart below that the savings rate started to deteriorate in the 80s and as of this writing, the savings rate is ~5%. For a more comprehensive study on savings rate in the last several decades, click here.
Meanwhile, debt has been increasing. According to nerdwallet‘s research, we have the following consumer debt figures outstanding:
The total debt owed by U.S. Consumers is $12.29 trillion dollars. That is a lot of debt! Now, couple that with the $18 trillion the US government has borrowed to date on behalf of its citizens, that totals to over $30 trillion. That is hell freezing over! You have a US GDP (Gross Domestic Product or Total US Income) that is only $18 trillion. This just shows you how broke the US is ($18 trillion Income minus $30 trillion loan = $12 trillion deficit)! The only reason why our economy is still running is the US can always print money at the expense of its tax paying citizens!
Avoid debt. It never sleeps. It is awake 24/7. Debt is a form of bondage. Debt is a burden that will always have a reckoning.
How much should I save?
Save at least 15% of your gross income especially when you are just starting your career.
The faster you can save, the faster you can invest. The sooner you can invest, the sooner you can get return on investments and the bigger the investments, the bigger the potential returns.
Moreover, there are certain investments that require a bigger amount of capital. For example, real estate investments require at least 20% down payment. So, if you are looking to buy a $100,000 Real Estate property, that would require you to put at least $20,000.
Empirically, if you look at the chart above, back in the 60’s and 70’s it showed that the average savings rate was anywhere from 10% to 15%. This era was also called the “Roaring 70’s.” So, there’s something about that savings rate that made the US economy great.
Personal note: From an early age, my mother always told us to save as she believed that no one knows what the future will hold and more often than not (especially in emerging economies), the future is bleaker than the present. So, she advised us to always be prepared financially, educationally, emotionally, and socially as early as we can.
I would say that among Asian Americans or at least all of the Asian Americans I associated with, saving is almost a religion.
The act of saving money is a sign of character strength. You subdue your immediate impulses (buying things) in exchange for a better return in the future.
Note on Emergency Fund
Before you start investing, you need to make sure you have enough buffer or cushion money in case of an emergency. Typically, this should be anywhere from 6 months to 8 months of operating expenses. So for example, your mortgage/rent, food, utility, phone, and other home expenses run about $3,000 / month that means you need to have at least 6x to 8x that amount or roughly $18,000 to $24,000. This is will cover any emergency expenses you may have in the future. Once you’ve met your emergency funding needs, you can start investing the extra cash in business opportunities that can increase your overall wealth.