Treating Savings Like a Bill

While most people agree that saving for the future is important, putting this habit into practice is often difficult.  According to a 2022 U.S. Federal Reserve Study, only 54% of adults said they had three months of living expenses saved in cash or its equivalent. When asked about spending, 51% said they would reduce savings if their budget was affected by price increases for other goods and services. ¹

We’ve found that people who choose to save “whatever is leftover” at the end of month tend save very little – or nothing at all.  To create the habit, we recommend the time-honored “Pay Yourself First” strategy, where you view your monthly saving as a bill that you must pay as opposed to a lower priority line item. This strategy involves a little bit of budgeting up front to set a realistic amount or percentage of total income that you can comfortably save on an ongoing basis, but results in savings that is earmarked for a specific purpose – for example: retirement, emergency fund, or new vehicle purchase.

Consider the following case:

Leigh (Age 30) has been reviewing her cash flow to determine how much she is spending monthly versus the net income she is bringing in. She makes $90,000 a year and currently contributes to a retirement plan through work. Her take-home pay is about $5,200/month, and after working on her budget, she’s determined that her monthly expenses are $3,300. Of her surplus, she’s committed to saving $1,500 into her investment account at the beginning of each month. This amount still leaves her some “wiggle room” each month for incidental expenses.

Elizabeth (Age 30) works at the same company in the same position, so her take home pay is also $5,200 each month. She’s tried to work off a budget in the past but doesn’t stick to it. Elizabeth says there’s always enough to cover her monthly expenses, and she saves any surplus at the end of the year into her savings account. The monthly savings amount fluctuates since she keeps everything in her checking account – and sometimes she dips into savings for bigger expenses. Elizabeth makes an average deposit of $10K into her investment account each December.

If we assume they contribute the same amount to their work retirement accounts and that they are invested in the same funds, at age 65 Leigh will have approximately $2.7M compared to Elizabeth’s $1.3M.

By treating savings as a bill, Leigh was able to save $8,000 more per year, and she was able to take advantage of compounding through a systematic monthly deposit into her investment account.  Since she paid herself first, Leigh was able to leverage this extra $8,000 in annual savings into a difference of more than $1.3M in retirement compared to Elizabeth.

**This case study is for illustrative purposes and uses a hypothetical investment return rate.

Sources:

1. Consumer and Community Research Section of the Federal Reserve Board’s Division of Consumer and Community Affairs. (May 2023). Economic Well-Being of U.S. Households in 2022.
   Federal Reserve Report

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DISCLAIMER: The scenarios and characters referenced in these case studies are for educational purposes only.  Rates of return referenced are conservatively based on aggregate historical market returns over time. Past performance does not dictate or ensure future success and should not be viewed as a recommendation or financial planning advice.