From the time we start handling money as children until the day we retire, we are constantly extolled to save money. Put some aside for a rainy day. Every penny counts.

Background
Lately, I have been seeing quite a few opinion pieces lamenting the virtually non-existent savings rate that exists in this country. Very few people maintain any sort of balance in their bank savings accounts if they have one but savings also includes things like 401k plans or IRAs. When the median amount in 401ks is about $23,000, people who are expecting to live comfortably in their retirement are in for a bit of a shock. Naturally people who earn much more tend to have more savings but interestingly enough so do those on the other end of the income scale. These low-income workers do have quite a bit of cash savings because of lack access to credit but also they know that their situation can turn bad at any moment and they need something to fall back on. It is the vast middle class that seems to be in the worst situation.
There is no question that saving is difficult; temptation dogs every step of the way: buy this iPod, get these new shoes, furnish your home from Pottery Barn and we give into this temptation because it is easier to do so. But I do not think that is the real problem though. Having a normal life today with everyday expenses like gas, groceries, utilities, and basic clothing consumes nearly all of the net income we have.

When I hear about various government initiatives to increase savings through raising 401k limits, Healthcare Savings Accounts, Social Security replacement saving accounts, education saving savings accounts, I wonder if these lawmakers realize just hard is to save any portion of your income today. As growth in middle class incomes have essentially flat in the past six years, any price increases such as we are experiencing now with gasoline and healthcare insurance premiums gnaws away what little remains of the paycheck.

Saving today is just a way to defer spending money into the future but people have to deal with the needs of today. Saving for your family or retirement is problematic.

Family Planning
A change in circumstances like a prolonged illness or a birth of a child can wreck havoc with the family finances. For example, placing my newborn daughter in daycare a few months ago meant a transfer of money from other household expenses to the daycare. For her day care, I will be paying about $8300 this year which is a large portion of the family discretionary income. It is offset by some through the child tax credit and dependent care tax credit but only by $2100. The difference represents a shift in either spending or saving for the household to the daycare. It will be a similar situation if a family member took ill and required prolonged care.

So many families are faced with the situation that to save would required significant sacrifice and far too many families just do not have the ability to make those sacrifices. This is a reason why many people are in debt not because of extravagant spending but paying for everyday expenses and emergencies.

One recommendation that financial planners always put forth is to have the equivalent of three months of income stashed away in a special emergency fund. It is never clear whether they are talking about net or gross income but regardless, for most families the equivalent of having 25% of your income placed into such of an account is nearly unattainable. Certainly it can not be accomplished within a year; it may actually require five to ten years to build up this type of account at the near exclusion of all other savings.

Then there is the case of saving money for university and post-secondary education. Sending your child is getting more and more expensive. Not everyone deserves to go to college but many families think it is their right and would do everything they can to put their children through. There are various saving vehicles available. Some provide prepaid tuition and fees; others are set up like IRA accounts where the money withdrawn is not taxed. But still you have to contribute to an event that is as far into the future as fifteen years away with no idea how much it would really cost for the initial four year program. Many families now are realizing how grossly they underestimated the costs and have to use mortgage refinancing or have the child take on student loans to pay the costs. People do not think about college costs until the child is almost in high school but then again consider that when the child was born, most families are young and just starting off and getting by.

For most families, it is the paycheck to paycheck living that really raises the stress levels. This is really an acknowledgement that the social safety net is quite weak and that you are on your own for the most part. Having substantial savings can alleviate that stress significantly knowing that for awhile you are okay. But in the real world, saving is a luxury only some can do and rest of us just gets by.

Retirement Savings
The real problem though is saving for retirement. Company pensions are becoming scarcer these day and while the Social Security crisis is a bit overblown, there will be less forthcoming from the government in the future for senior citizens. So to make up the difference in income and the lifestyle they want to lead as retirees, people have to save now. Again, though, family incomes today do not have the ability to contribute to any sort of retirement plan. The median amount people will contribute to their 401k or similar plans is about $2400/year. Very few people can contribute to the maximum amount which for 2006 is $15,000, up from $14,000 last year. As for me, I will contribute about $9600 this year into my 401k plan. That amount represents a significant portion of my income but I think it is essential to have funds in the account now so to take advantage of the long term growth of money. I could use the contributed money to pay for expenses today but then I will be shortchanging myself for the future.

However, it is the expectation that the stock market will continually grow that underpins the whole rationale for investing in 401k and IRA plans. A stock market crash or a prolonged recession can undo years of careful saving and sacrifice. But that is the risk you have to take when you invest. Otherwise you may just be better off placing your money in real assets like real estate.

Thinking about the future
There is a saving crisis in this nation. Of that I have no doubt but it is just one of many crisises facing families today. If a family has to split its income and follow the recommendations of various financial planners and put some money in 401k plans, some in college fund accounts, some in a rainy account, there will be scarcely anything left over to survive on.

Sometimes I think people have a lottery mentality to life, that some event will put a large amount of money in their hands whether it is the lottery, a college scholarship, a big tax refund or an inheritance of some sort. That is a dangerous way of thinking in expecting that the future will take care of itself. Most likely it will not happen. But in a way, it is helpful to be optimistic considering most families’ current saving situation is rather depressing.

I have no real magic recommendations on how to save. Saving requires patience, time and sacrifice. If you remain focused on your saving goals then you can succeed to some degree. My income does not allow me to save for every situation I mentioned above so I decide to focus my savings on retirement and college funds and hope that no calamity befalls us. It is a bit of a tightrope act to keep it all together and a fair bit of sacrifice on my part but slow steady wins the race which in this case is the race of life.