As the winter holidays approach, you may be bombarded with ads encouraging you to spend money. hard earned money. However, this is not just a seasonal issue. In general, Americans tend to be spendthrifts, especially when compared to how people spend and save in many other cultures around the world, says Clark Howard, money expert and personal finance media personality. explains in his recent YouTube clip for “Save More.” , “Reduce Spending” channel.
In middle-income countries, people typically save about a third of their income, he said. So for every $1 you earn, you save about $0.33. However, Howard explains that Americans typically save just $0.06 for every dollar they earn, although there is some variation over time. For example, the US personal savings rate (the percentage of money left after taxes and expenses) in October 2023 was just 3.8%. According to the Bureau of Economic Analysis.
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American culture typically encourages people to have fun today and take care of tomorrow, but that can have unfortunate consequences, Howard said. For example, if you are in debt, not saving enough For retirement or both. To kick your habit of not saving and start building wealth, consider Howard’s two money rules:
No matter what, start saving at least 1 cent of every dollar you earn
The average American often only saves about $0.06 for every dollar they earn, but many end up spending more than they earn, making things even worse. Howard explains that even with very high incomes, many people still don’t save money. To break the cycle of spending no matter how much you earn, start by saving one cent of every dollar you earn, even if you’re currently in the red or in debt, Howard says.
After six months, he suggests saving another penny of every dollar, then repeating the process again in six months, and so on. Then, in five years, he will go from having no savings to saving 10% of his income. That’s a great standard, Howard says.
These savings can be invested in convenient vehicles, such as savings or retirement accounts, he notes. The key is to learn to live on less than you earn, becoming a saver rather than just a spender.
Take advantage of your Roth IRA
Roth IRAs not only help you with your finances now, but they can also help you in retirement. Howard explains that if you can live comfortably with less money, you may someday need less money to fund your retirement. Therefore, that mindset can lead to benefits such as allowing you to retire sooner than you would otherwise.
Howard suggests using a Roth IRA account as part of, or in addition to, a savings plan where you save 1 cent on the dollar. These accounts can help serve as an equalizer in that the tax benefits for retirement savings are not biased toward the wealthy, he added.
Single taxpayers with a modified adjusted gross income (AGI) of less than $138,000 and married joint filers with a modified AGI of less than $218,000 can put up to $6,500 into a Roth IRA for the 2023 tax year (or $7,500 if You can donate up to $100. (over 50 years old). The phaseout scope applies to high-income earners.
A Roth IRA allows you to deposit after-tax dollars into your account when your income tax rate may be relatively low. And if you meet certain eligibility requirements, such as being age 59 1/2 or older, that money can grow tax-free and be withdrawn tax-free. Your income at that point could be much higher than it is now, so being able to withdraw your money tax-free is a big advantage.
So by getting into the habit of saving money and contributing to your Roth account, you can create a new cycle, Howard says. He is not someone who is struggling to get ahead and is able to reorient his finances towards building wealth.
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