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Every year about this time most of us go to the doctor or pharmacist for a flu shot. We hope this will help us avoid the misery and discomfort that is common with influenza. While slightly less visible, the financial flu can be even more problematic.
Research tells us that more than 70% of Americans experience significant financial stress on a daily basis. This stress is often a precursor to full blown financial flu. Just as an irregular skin lesion can be a warning sign for skin cancer, there are financial indicators that provide hints of serious financial trouble. What if there were a way to inoculate yourself against this financial pain?
Your Saving Rate is the Key
The most important of all these metrics is your savings rate. Regardless of how much income you have, without savings your financial future is limited . The video below briefly details how your financial future is mostly dependent on what you do today. Saving for the future doesn’t guarantee your future- just as a flu shot doesn’t guarantee you won’t get the flu- but it helps.
For high income earners, saving the most while you are earning the most can be a powerful inoculation against the financial flu. Savings provide liquidity and flexibility which are important building blocks of successful financial futures.
Human Capital Triangle
Think about the stages of your financial life as a triangle. When you are starting out, the bottom of the triangle represents your future years of earnings capacity and dwarfs your financial capital at the top point. The sides of the triangle are savings on one and spending on the other. The idea is over time to “flip the triangle” so that as your human capital decreases, your financial capital increases.
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Without sufficient savings, as your human capital is depleted, your financial life moves closer and closer to the brink.
In the paragraph above, I used the words “ sufficient savings . ” By that, I mean an amount that invested appropriately will provide for the continuation of your lifestyle for 30 years or longer after your retirement.
How much is that amount? Well, it’s likely more than you think. A few percentage points of your income saved in your 401-k won’t solve this equation. In reality, depending on age and other resources, a savings rate in the range of 15- 20% of income, spread between both taxable accounts and retirement plans is needed.