According to the Federal Reserve, Americans dipped into savings to the tune of $311 billion in the last quarter. The Wall Street Journal reported that this is the deepest that Americans have drawn into savings in 6 decades. In fact, in the last 57 years, Americans have never made a net quarterly withdrawal from savings so this was quite a data point!
Why are Americans dipping into savings? 3 Simple reasons:
- No Emergency Fund
- Expenses are too high
- Income is too low
Before you laugh at my simplistic reasons:), understand that as simple as they are, they are the usual suspects and that they apply to many people who are in trouble financially. I would also add “giving money to relatives” but I’ll just assume that part under ‘no emergency fun’ or such.
No Emergency Fund
Perhaps the stats include this because the figures include all savings, but I will say that people who have to dip into 401(k)’s for hardship withdrawals or IRA’s, likely don’t have an emergency fund built up to cushion this problem (I wrote about the rise in 401(k) hardship withdrawals 2 years ago HERE on my personal blog and HERE). Simply having an emergency fund, that will last for 6 months or more, with a plan to replenish it once the emergency has passed, can help avoid the need to withdraw savings in many instances.
Expenses Too High
Some people have accumulated too much in the terms of regular monthly bills! High mortgage payments, online subscriptions, magazine subscriptions, gym memberships we don’t use (perhaps should? – paying the membership is not the same as exercising), and many more items that we become numb to are actually eating away at potential savings. It makes sense a couple of times a year to inventory what you are spending money on (for those of us who are not anal spreadsheeters) and eliminate those regular useless bills, refinance a mortgage that makes sense to, cut out luxury recurring payment items (e.g. it’s nice to have the Amex Platinum card but they have cut out some good benefits over the past 2 years and for me, there is no return on the $400 annual investment), and eliminate excessive spending items (are you going to the hair stylist TOO frequently?).
Income Too Low
Some people have come to me thinking they were bad budgeters – spending too much money on silly things and thinking they should cut back. I soon find out that’s not the case. They just simply don’t make enough money. For some people, their housing costs, car expenses, food and energy – all necessary items – cost more than their take home income. In these situations, drastic action is needed. if you find yourself here, then either you must get a new or second job, or you must move, sell your house and change entirely your personal cost structure. Meaning, either your income increases substantially enough or your structural/ fixed cost scenario changes.
People! It’s 2011 – if you are already a year or more beyond some past resolutions or if you are far behind some goals, it’s time to take the drastic action recommended in this article. What will you decide (or not decide) to do?
Let me know if I can help – coaching people to financial success, and working on my goals alongside my clients, is something I truly enjoy.