The topic of "savings" is often a stressful one. However, it can have a tremendous impact on your quality of life. With many choices in savings accounts, choosing an option can be difficult. If you're starting out, it's a good idea to invest in easy-to-use financial tools like a monthly budget worksheet or expense tracker apps. Next, you may decide to utilize multiple savings accounts, each geared towards unique purposes.
An Example of Bad Financial Advice
In the 2010s, a lifestyle movement called the Financial Independence, Retire Early (FIRE) movement became popular among Millennials. The FIRE ideology involved decreasing expenses, increasing annual income, or both. Additionally, many people ascribing to the FIRE movement adhered to the 4% Withdrawal Rule.
What Is the 4% Withdrawal Rule?
The 4% Withdrawal Rule assumes you have made adequate gains in a retirement portfolio to cover expenses each year. However, the 4% withdrawal rule-of-thumb relies on the Consumer Price Index (CPI) increasing annually. Assuming another Great Recession never happens again, the 4% rule is doable.
This method of saving also assumes you'll never fall ill, face unexpected problems, or have to deal with sudden emergencies.
The "Multiply By 25" and "4% Withdrawal" Retirement Rules
Back to the savings question: To identify how much you should save under the FIRE plan, you'll need to multiply your average annual income by 25 years (that's the "multiply by 25" rule). The resulting number is what you'd need to save to retire comfortably. For the 4% rule, you'd need to rely on the "multiply by 25" figure to withdraw 4% in the first year of retirement. And, ideally, you'll withdraw 4% every year after that (adjusted for inflation).
Hardcore FIRE practitioner Peter Adeney (known by his pseudonym Mr. Money Mustache) claims he's content with $25,000 annually. However, that amount would require many to live in poverty. To put it in perspective, the Pew Research Center places the median income of a "low income" household at roughly $25,600. To be considered middle class, the minimum annual income would have to be at least $80,000.
So, that's why critics of FIRE maintain that the 4% rule isn't for everyone. In addition, the rule also doesn't take into consideration factors like viral pandemics or economic downtowns. Retired FIRE Millennials found this out the hard way when their coveted investment portfolios plummeted by six figures in one day.
" [,,,,] a rule of thumb that says you can withdraw 4% of your portfolio value each year in retirement without incurring a substantial risk of running out of money. Using this rule, for every $100,000 you have, you'd withdraw $4,000 a year. This rule is based on solid academic research. That's great. We all like historical research, particularly when it comes to serious topics like making sure you don't outlive your savings. But the research used a "set it and forget it" approach — it did not account for the ability to adjust behavior along the way. In other words, basing your retirement withdrawals on such a rule is like planning your finances based on your situation at age 25, and then never again adjusting the plan." —Market Watch (2019)
Our point? The above shows how static financial management trends can ruin lives. Even if you have several million dollars in a portfolio, you must track the movement of your money and be mindful of socioeconomic trends. It doesn't matter whether you're putting money into a savings account, retirement account, or investment account. Here are six reasons tracking your money pays off big time.
1. Purchase Things You've Always Wanted
It's fair to assume that most of us work to enjoy life, not merely to survive. It boils down to this: would you prefer to buy what you want now or save for a better retirement? By tracking your savings, you'll enjoy greater peace of mind and future security.
2. Create a Balanced Work-Life
Let's face it: most of us work long hours — no matter our social status. However, keeping a close eye on your money may help you create a better work-life balance. By building an emergency or savings fund, you may be able to work less and enjoy life more.
3. Become Financially Independent
Depending on your savings rate, you could very well become financially independent. According to Forbes, there are several factors that can determine how successful one is at becoming financially independent. They include the willingness to practice frugality or "delayed gratification" and the motivation to advance one's career and savings rate, regardless of income.
4. Pursue an Education or Upgrade Professional Skills
If you've built a savings fund dedicated to career advancement, going back to school may be a good decision. Subsequently, your new skills may net you a promotion, which in turn will allow you to save even more for your future.
5. Finance a New Venture or Start-Up
Are you looking for a way to get out of the rat race? It's said that the average person thinks of a million-dollar idea at least once a year. The biggest obstacle, however, is obtaining funding to make those ideas reality. However, if you systematically track your savings progress, you may be able to finance your startup yourself.
6. Help Family or Friends Pursue Their Dreams
After securing your financial future, helping those closest to you may add to your satisfaction in life. When we help others advance, we inevitably strengthen our inner circles. Ultimately, strong inner circles lead to strong communities that shape entire cultures.
Get Support in Tracking Your Savings
As shown above, huge rewards await those who persevere. However, building a savings fund takes discipline, knowledge, and patience. If you're interested in acquiring the tools and skills to achieve your financial goals, we encourage you to get in touch today.