Americans don’t save enough and are too quick to shift course on their long-term investments.
In order to help clients curb these tendencies, I encourage them to adopt the mindset that contributions to their investment accounts are fixed and should not be withdrawn unless there is an extreme emergency.
It’s also essential to build up a cash reserve fund so you don’t have to touch your nest egg — and possibly incur a tax penalty or sustain a heavy financial loss — when an unexpected expense arises.
But even in this key area, Americans are falling behind. The personal savings rate in the U.S. peaked at 17% in 1975 and has been steadily falling ever since, according to the Federal Reserve Bank of St. Louis. It now sits at 5.5%.
Your first step should be to build a cash emergency fund that is equal to three-to-six months of living expenses. And don’t touch it. People often withdraw their savings and continue for years without replenishing the money. Sometimes they don’t even know where all the money went after the immediate need was met — the extra cash just gets absorbed into their monthly spending.
After that, pursue a diversified investment strategy that matches your long-term goals. And remember — I said long-term, not short-term.
I’ve identified a common reason we’re not investing as much as we could: we’re quick to cut our contributions to investment accounts and slow to replenish them. When I talk with people about how they manage their finances, I often hear things like:
“I stopped contributing to my 401(k) because the market was dropping, and I couldn’t bear to throw good money after bad.”
“We needed to fund a down payment, so we switched all of our savings to our house fund.”
“I needed to help a family member for a few months so he could get back on his feet.”
Those last two financial challenges can be met with a robust cash reserve fund, as noted above.
The first statement runs counter to a wise investment strategy. Diversify your holdings and invest for the long-term. Don’t be swayed by the market’s ups and downs.
Putting your funds in an investment account is a self-reinforcing behavior:
This article was originally published on NerdWallet's Advisor Voices.
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