BillSage 7-3-3 Savings Plan
America is facing a savings and retirement crisis. Here are a few amazing statistics on the state of American savings and retirement planning.
- 50% of Americans don’t have $400 in savings
- 63% Of Americans Don’t Have Enough Savings To Cover A $500 Emergency
- 48% of older households have “no retirement savings.”
- A recent study found the average retirement account balance for, “workers aged 55-64 was $92,000—enough to provide an income of just $300 a month over the course of retirement”
- The reality is, nearly half of Americans have no retirement savings at all. People age 55 to 64 have an average of $104,000. Those 65 to 74 have an average of $148,000. If those amounts were turned into an income stream (using an annuity) to supplement Social Security, it would be roughly $310 and $650 a month. Not enough.
These statistics paint a very dire situation for most Americans. “When you break it all down, most of us are just one misfortune away from financial oblivion.” – https://www.nbcnews.com/better/health/most-us-live-paycheck-paycheck-what-it-does-your-health-ncna816411. One of the large parts of this problem is everyone has a plan to start saving tomorrow. Today is the day to take action and begin implementing BillSage’s 7-3-3 savings plan.
Everyone can retire wealthy and debt free, however from what we can see above most people will not. One of the keys to living debt free and being prepared for retirement is to automate your savings plan today. Not after you pay off the next bill, not after you have met some savings goal, not after your next raise, start today. BillSage’s 7-3-3 savings plan will help you to automate your savings and build wealth for retirement by following these 3 simple steps. This is a plan for everyone, regardless of whether you are working your first minimum wage job or pulling down 6 figures a year.
Step 1 – Save 7% into your retirement plan
The first, largest, and easiest step is to save 7% of your gross income (total pay before taxes, insurance, etc. are deducted from your paycheck) to your company sponsored retirement plan. If you are self-employed or your employer does not provide matching retirement funds, your first goal is still to setup 7% savings into an IRA or other tax deferred retirement plan. Unfortunately you will not be able to boost your retirement savings from employer matches, but you still should be saving for your retirement and taking advantage of the power to grow retirement savings tax free. This is such a critical part of investing for retirement, that before you settle on your long-term career path and employer, you should check that they provide some form of retirement savings match.
Take all the FREE money first!
This is the first and most important step is because nearly all employers have matching contributions for employee retirement plans. This gives most Americans an immediate guaranteed 50% return on investment (ROI). The company will periodically match employee contributions up to a certain percentage of gross pay that the employee deposited into their retirement account. This can be done monthly, quarterly, or on an annual basis. Check with your HR department for the specifics of your company plan. Most employers match 50 cents on the dollar for the first 4-6% deposited by the employee.
For example, if someone is making $50,000 a year and their company matches 50% on the first 6%. The employee would contribute $3,000 each year to their retirement plan, and the company would match by depositing another $1,500 directly to their retirement plan. Any savvy investor would readily jump on an opportunity to get a guaranteed 50% return on investment, and max out the contribution to get the largest return possible. In this example the employee would have another $62,000 dollars in retirement savings after 20 years at the normal stock market rate of return. In same example, except giving those savings 35 years to grow would mean another $200,000 dollars of FREE money when you go to retire! Some companies also provide extra bonus contributions based on annual company profits. These bonus contributions are sometimes only given to those who contribute to the company retirement plan, or maybe distributed based on match of employee contributions.
By getting to the 7% mark you will make sure you fully take advantage of employer matches (ie. FREE money), while setting yourself up for a generous retirement savings. By setting up your contribution based on a percentage from your paycheck instead of a fixed amount you create an automated system so that a percentage of future raises also go into your retirement savings.
Race to taking your cut of FREE money
Many don’t realize that companies consider your matching funds as part of your total compensation package. Meaning they are expecting to pay you out these funds each year. When you leave money on the table by not contributing your maximum match percentage, you are telling your company you don’t mind being paid less! Also, when considering the impact of compounding interest, it becomes easy to see how tens of thousands or hundreds of thousands is being left on the table by the time you would reach retirement. Then when you consider that most Americans have less than $150,000 in their retirement savings it is not hard to see that this one step would nearly double their retirement savings.
If you are not contributing anything or cannot immediately contribute 7%, then your first goal is to get there as fast as possible. One way to quickly get to this goal is to take your next future raise and completely use to increase your contribution. For example, if you get a 3% annual raise, when that raise takes effect increase your retirement contribution by that amount. Your take home pay will stay the same for another year, but if you maintain your expenses for one more year you have jumped 3 years ahead when compared to only adding an 1% per year to your contribution. Adjusting your retirement savings is typically very easy. Contact your HR department and this can be changed with a simple form or phone call and then money is taken out of your paycheck automatically.
Step 2 – Save 3% into an emergency savings
After you get 7% of your income being saved to company matched retirement plan, your next goal is 3% of gross income put into a savings account. This money is used to create a buffer to handle 3 months of expenses. Sadly over 70% of Americans are living paycheck to paycheck regardless of income. – https://www.nbcnews.com/better/health/most-us-live-paycheck-paycheck-what-it-does-your-health-ncna816411. Yes, even people making over $100,000 a year are living paycheck to paycheck just the same as those making minimum wage. Which means most Americans are only one minor financial setback away from bankruptcy. This could be as simple as a trip to an emergency room for a minor injury, a car accident, natural disaster destroying their property, or any other host of unfortunate events that happen in life.
The goal of this savings account is to create a buffer to handle emergencies. Once you have built a more than comfortable buffer for emergencies, then it provides funds to invest into assets. These funds provide insurance that when (not IF but WHEN) these situations happen, “you will have a bad day, not a bad life.” – Clay Clark, ThriveTime15
What constitutes an emergency?
Unfortunately, many people build an “emergency” savings account and then use their savings for vacations, new electronics and gadgets, or cycling in and out of debt repayment. Emergency savings should only be used for emergencies that affect your ability to survive or continue to make future income. For example, major home repairs after an act of god, major automotive repairs, medical issues, loss of job, etc. Even in those circumstances, dipping into your emergency savings should be a last option. Because of the difficultly in replenishing those funds the option of financing those via a credit card or other line of credit and then setting up repayment plans should be considered before spending out your savings. Also set up separate savings accounts if you are trying to build savings for major purchases or vacations. When those funds are mingled in one account, it can become very difficult to track emergency and asset funds versus your funds for other expenses, or too easy to dip into those savings with the intent to repay them later.
Keep funds with 100% liquidity, and near immediate access
These funds should always stay in a standard savings account. The goal is to have short term access to this money without incurring any potential losses or penalties versus having this money in certificate deposits (CDs), bonds, money markets, or other investments. Most will immediately be concerned about the loss of interest. The reality is that the interest would only be several hundred dollars a year on $10,000 over a standard savings account. However, the safety net your savings provide gives security against overdraft fees, credit cards, or other high interest charges associated with payday loans or store credit cards. The protection from those fees will more than save the few hundred dollars a year in interest you could make while providing complete peace of mind by knowing unexpected emergencies will make for a bad day, not a bad life.
Once you have more than 3 months of expenses saved into this account, you can begin to look for other investment opportunities with these funds (NOT stock market investments, those are covered in the next section). Funds beyond 3 months of expenses are used to purchase assets. Robert Kiyosaki best defined assets in his New York Times Bestseller “Rich Dad Poor Dad”. “Assets are things that produce income, liabilities are things that cost you money”. This money could be used for purchasing rental properties, investing in businesses, or anything that produces money for you without your work! While you are getting the funds saved you can figure out what those ventures will be.
Automate your way to riches
For this to work, you must automate your deposit into savings after EACH paycheck. You have a few options to automate your savings.
- Contact BillSage and update your monthly budget to include deposit into your savings account. We can setup so this comes out with your normal draft, and then you can rest assured your savings will start growing.
- Your employer maybe able to help. If you are already getting direct deposit, then you may be able to can likely setup to split your paycheck deposit into separate accounts. Contact your HR department, and this is usually as simple as filling out a new direct deposit form.
- Another option is to setup an automatic transfer with your bank. If your checking account and savings account are at the same bank, then this can be handled through the bank’s website, mobile app, or customer service without any additional charges.
Step 3 – Save 3% into private stock account
The final step is to save an additional 3% into a private stock account.
Why don’t I just increase my retirement plan by another 3%?
The reason you want these funds saved into a private stock account is because:
- You have greater control of how these are invested. Most employer retirement plan have a very limited set of mutual funds and company stock to invest in.
- Don’t put all of your eggs in one basket. Since you already have 7% of your income in your company stock and handful of mutual funds (which are all being managed by one company). You want to use these funds to spread out into different investments.
- You are not going to get any additional benefit or matching funds from work. You have already gotten the biggest benefit from your employer plan, the free matching funds.
- In case of a dire emergency or one in a lifetime investment opportunity, you can draw out these funds WITHOUT excessive tax burdens and penalties that are imposed on retirement accounts.
Where do I start?
Initially starting your own private stock account can seem daunting, and many are tempted to turn to a financial adviser or company to handle it for you. While there are many benefits of financial advisers, starting out they are often unnecessary. Setup a simple online trading account with one of the major online trading platforms Most of these websites have a very simple online enrollment. After linking to your checking account and transferring funds, you are setup and ready for the world of stock investing.
What do I invest in?
Starting out new investors should stick to standard ETFs (Electronically Traded Funds). These provide several benefits. First off, these funds give you the ability to invest in huge swaths of the stock market versus a single company with a small financial investment. Secondly these also give you the ability to trade with much smaller capital and lower or no trading fees. Otherwise, you are being charged $6 – $10 each time you buy a stock. According to Burton Malkiel in “A Random Walk Down Wall Street,” his synopsis is that any investor that is primarily invested in ETFs would meet and in most cases beat the best mutual funds, financial advisers, or any other publicly available investment strategy over the long-term. Finally make sure to select automatic dividend re-investment, this will make sure you are taking advantage of compounding interest without having to continually re-balance and manage your account.
Automate your way to riches
Just like your savings account, automate deposits into your stock account after each paycheck. Contact BillSage and adjust your budget to include payment into your trading account. Or if you want to manage this yourself, the trading platform should give you a way to setup automatic drafts from your checking account. If you choose to setup on your own, make sure your drafts pull out one business day after your paycheck deposit to make sure you don’t incur overdraft fees due to a timing issue between the paycheck deposit and trading account withdrawal.
Yes it can be that simple. However, for most Americans this will take some time to fully implement into their budget. Paying yourself first by saving is your number 2 item in your budget in our BillSage Box Budgeting System. The BillSage 7-3-3 Savings Plan will help develop the mindset and habit of paying yourself first through savings. This is so import you need get this setup before beginning to pay down long-term debt obligations. Otherwise, if you use your funds to pay down debt and have not built the habit of saving first, you will likely end up back in debt on something else.