A Modern Survival Guide Interlude
This is the Modern Survival Guide, a guidebook for navigating and interacting with the modern world. And this article is an interlude, an article that talks about a tip for modern living. This isn’t a philosophical insight, or a deep discussion of human impulses, or an explanation of some major phenomenon; it’s just something people might want to know. And one thing we all ought to know is how to save money, since money apparently is important. Who knew, right?
So let’s get down to brass tacks. You should be saving money. Not all of your money; you have to spend something to survive and hopefully have some fun. But you should be saving some of your money for at least four reasons: retirement, buying big things, rainy day funds, and emergency money.
Retirement funds are for when you can’t work anymore. Savings for big things are for buying TVs, vacations, and Christmas gifts. Rainy day funds are for when you need some money in a hurry. Emergency funds are for when the world is going to hell and you need cash right now.
A lot of people aren’t saving for retirement, and that’s short-sighted. Unless you plan to take up motorcycling at age 50, you’re going to need money when you can no longer work. And you’re going to need a LOT of it. Being old is expensive, and you will pay through the nose for healthcare if nothing else.
A lot of people don’t save money, and rely on credit cards when their needs outstrip their cash. That’s not ideal. Credit cards charge interest, and interest adds up. Saving money usually pays interest or dividends. The net result is that if you buy things from savings, you end up paying less than if you bought using credit.
And a lot of people aren’t budgeting rainy day funds or emergency funds, and that’s just naive. The world is going to throw some crap at you. Try to be prepared for it.
So save money, if you can. If you can’t, that’s a different discussion.¹
There are a lot of different ways to save money, some more useful than others, but all of them have their place in different circumstances. And that’s a key point — saving money is about risk mitigation, and you save money in different ways to mitigate different risks. Not every method of saving money is appropriate for every circumstance, and they’re not supposed to be. Some people are fans of one or another of these methods over the others, but I tend to think that they each have their place in a balanced savings plan.
In this article I’ll cover some basics of the following savings options, along with a quick discussion on how (and when) to save money in general:
- Long-term retirement investments
- Long-term investments
- Bank Savings
- Precious Goods
- Money Under the Mattress
Long-Term Retirement Investments
These are investments that you make (hopefully, if you’re lucky) as an automatic deduction out of your paycheck, or if your employer doesn’t offer that benefit, out of whatever pieces of your paycheck are left over after bills. Retirement investments are offered as dedicated investment packages by all major banks, most investment firms, and many unions and credit unions.
I’m not going to tell you which option to choose of all the retirement plans out there; that’s a whole other article by itself. What I will say is that you should be putting as much into your retirement account as your employer will match, or at least 5–7% of your paycheck, whichever is higher. You should do that for your entire career. And you should never, ever touch retirement funds until you actually retire, literally unless your life depends on it. Not even when your retirement plan is losing money. One of the critical lessons of stock investments (in a diversified portfolio) is that they will usually recoup losses over the long term. Recessions come and go, but the overall value of the stock market over time looks like this:
Otherwise, the standard investment advice applies: go risky while you’re young, move to mid-risk investments in middle age, and go for low-risk investments as you get close to retirement (an investment adviser can help you tell which are which). And start young. If you’re reading this in your twenties, and you don’t already have a retirement account go get one right now. Math indicates that the more money you invest now, the more you’ll reap later, and it’s easy for small sums you invest early to turn into large sums later as a result of compound interest and stock market expansion. This gets harder the later you start.
These are investments you make for a long-term yield, but aren’t retirement accounts. These include bonds, money market accounts, index funds, or targeted investment portfolios. Long-term investments are designed to earn money over decades; these should be investments that ideally still yield enough money to make you a profit after inflation.²
Every investment group, major bank, and most unions and credit unions offer long-term investment packages. You may also want to be adventurous and wade into the stock market yourself; this depends on your level of knowledge and level of risk acceptance. Just remember that portfolio managers will take a not-small percentage of your overall earnings unless you’re managing your own money.
For retirement accounts and long-term investments, you need to practice diversified investment. Don’t put all your apples in one basket — no matter how nice the basket. Things that look stable today may not be stable in ten years… or, you know, tomorrow. The lesson of every stock market crash is that very, very smart people are perfectly capable of reading the signs wrong. Diversified investments spread the risk out and make it less likely you’ll lose everything when one company goes bankrupt.
Much like retirement accounts, if you can do it I would recommend opening at least one or two long-term investment portfolios. Start young, put in a little money at a time, and watch it build.
Bank savings are for buying big things, rainy-day funds and, to some extent, emergency funds. The disadvantage of parking a large amount of money in a savings account is that savings accounts don’t pay enough interest to cover the rate of inflation. So over the long term, you’re “losing” money by putting it in savings, in the sense that money you leave in savings is losing its buying power.³
That doesn’t mean bank savings are bad. Quite the opposite.
Bank savings are for holding money you’re probably going to use soon, but which you want to keep separate from your everyday spending account. There are a lot of reasons for doing this; it’s easier to keep track of how much you have available, for one thing, and it also creates a psychological and physical barrier to keep you from impulse-spending this money. I also know people who use savings as tools for creating longer-term investments by adding to a savings account until it reaches a certain point, and then emptying it into another investment vehicle — this is a good way to develop a habit of long-term investment.
Your bank savings should cover a few things that you know you’re going to spend money on. For example, it’s always advisable to keep a month’s rent (used to be six months, but welcome to 2018) in the bank in case you lose your job. I’d also recommend keeping a budget in the bank for the more-or-less-inevitable maintenance fees that come with owning a car (usually around $1,000 a year). And of course, it’s never a bad idea to budget for healthcare, if you know approximately how much you normally spend on doctors.
Bank accounts are also useful for saving some money that you simply don’t want exposed to risk. It’s not a bad thing to keep a few thousand dollars in the bank, if you can swing it, because it’s guaranteed and available, unlike bonds, which are just guaranteed. This gives you a pot of money you can use however you see fit, at whatever point you see fit, with zero risk.
Finally, it’s a good idea to sock some money away in an account for rainy days, and for emergencies where you think you’ll still have access to electronic funds in that emergency. Vacation disasters, sudden medical bills, short-term emergency travel; things like that.
This is money you sink into jewelry or precious durable goods, like gold, for the purposes of long-term investment or emergency funds. People who buy Krugerrands (we all have that friend) are doing this, for example, and part of the point of jewelry is that you can easily transport wealth.
The idea behind saving via precious goods is twofold: Firstly, on the whole precious metals tend to hold value fairly well over long periods of time (hence the descriptor “precious”), and so can represent a legitimate avenue of investment in their own right. And secondly, you can cram a lot of wealth into a small amount of precious goods, which theoretically makes them an excellent means of storing money in emergencies.
This latter point is why a lot of preppers invest heavily in gold; you can cram $50,000 into about 2.5 pounds of gold, which makes it marginally lighter and smaller than the equivalent amount of money in common paper bills. And it doesn’t rot, or rust, or degrade, which is another point of value for people who are worried about the collapse of civilization.
In general, unless you are worried about the collapse of civilization, I would advise against buying precious goods as an investment strategy. The markets for these goods are highly volatile, and it’s very easy to get on the wrong side of the market unless you are very careful. Also, unless you are willing to invest in security measures, keeping a lot of money in precious goods is fairly risky, especially if you keep them in your home; there’s a reason banks exist in the first place.
Money Under the Mattress
A lot of people do not trust the stock market or banks, or do not have access to either, and prefer to keep their funds in cash. I call this type of savings “money under the mattress,” and to be entirely fair… they’ve got at least a bit of a point.
In my opinion, there’s always a place for money under the mattress, in any kind of consideration of diversified savings. It’s more vulnerable to theft, and extremely vulnerable to inflation, but money under the mattress is there for those instances when other investment systems simply stop being trustworthy. That kind of event seems to happen about once every century, which seems like a long time… but the human average lifespan is in the 80s. So it’s a pretty good bet it’ll happen at least once in your life.⁴
So maybe keep a few hundred in your sock drawer.
How to Save Money
Here’s the tricky part. All the options we’ve talked about so far don’t mean anything if you aren’t able to put away some cash. That means you have to be disciplined with money; if you get your paycheck and blow the whole thing in a weekend at the bar, you can’t save money.
The best way to train yourself to save money is to simply make a habit of putting some amount of money aside out of every paycheck. Put it in a savings account, or buy stock, or just stick it in a sock drawer; just put something aside. Over time, you’ll stop noticing that this amount is even missing from your spending cash, because you’ll have grown used to budgeting without it. Then, as your circumstances hopefully improve with age, increase the amount.
This comes with some caveats. Not every income level will or can save money the same way. I’ve outlined some of my personal impressions below, but just know that I’m not an expert in this and I’m speaking anecdotally.
If you’re making less than $25,000 per year, in most parts of the US you probably can’t save money. You might be able to stuff some money under the mattress, but that’s probably about it. The cost of living is just too high in almost every place in the country to save anything with that income. And that’s just all there is to it. Your savings decisions are less on how to save money and more on either getting a better job, or finding the energy to get mad enough to rally enough people to change the system such that your circumstances are better.
If you’re making more than $25,000 but less than $40,000, you may be able to save some money. If nothing else, check to see if your employer offers retirement benefits and pay into that if they do — even if it’s only a percentage or two of your paycheck. The best way to do that is to set up an automatic deduction from your paycheck; take yourself out of the decision. Paying into a 401k, those contributions come out before taxes, and you won’t really notice them. This is also an income level where you should have a savings account, and try to chip in a few bucks ($20 — $100) every paycheck.
If you’re making between $40,000 and $60,000, you’re around median income in the US. This is a pay band where you should expect to have a retirement account — either pay into one your employer provides or open your own, then set up an automatic deduction from your paycheck to the tune of at least 5% (ideally more, especially if you’re still in your 20s). You should also have and regularly contribute to a savings account. At this income level you should also have just enough cash left over to have a rainy day fund — either in a bank, or in your sock drawer, either works.
If you’re making between $60,000 and $100,000, you can probably have a retirement account, a long-term investment account, a savings account, and still have some money you can put under the mattress or in a rainy day fund. Your problem at this level is more about maintaining the discipline to save money, not finding the funding (at least if you don’t have kids). Setting up automatic deductions and maintaining separate accounts for different purposes are good strategies here.
If you’re making more than $100,000, the world is your oyster. Go nuts. Do everything on the list. Why are you even reading this article? Go ask your financial adviser.
In general, you should save money after you pay your bills, after you buy your food, and before you spend money on fun things. Keep a roof over your head and feed yourself and your family first. Save money second. Buy non-critical things third. Now, this is a point that poor people get beaten with all the time, so I’ll address it here: it is ok to sometimes spend money on fun rather than save money!
If you’re human, and you’re poor, you will be under immense stress. Relieving that stress can be as important as mitigating future risk through savings. If buying a phone keeps you from having a stress-induced migraine, buy the phone. If getting a new set of pants raises your self-confidence enough to apply for a new job, buy the pants. Having savings is about preparing for the future. That means you have to survive the “now” first.
And a final point, if you’re fortunate enough to have significant savings, you’re fortunate enough to give to charity. So give to charity, for the same reason you save money: risk reduction. Charitable giving reduces risk in society by helping your fellow man. Eventually that works its way back to you.
Happy saving, friends!
¹It’s estimated that roughly half of Americans have nothing put away in retirement savings, and about 70% have less than $1000 in savings generally. That, frankly, is a terrifying vision of our economic system, and it’s one that will probably bite us pretty hard in the next few years.
²As a general rule, assume around 2.5% inflation per year. That means your money is worth 2.5% less every year, in terms of buying power. Invest accordingly.
³It’s worth noting that this is a deliberate decision on the part of the banking industry. There’s a LOT of built-in, institutional pressure to invest in the stock market. Take that how you will.
⁴One could make a reasonable argument that this kind of system-shock event happened in the 2007 recession. Then again, we haven’t corrected most of the problems uncovered during that event, so…