A couple of articles I read recently have caused me some concern. The first article dealt with an increase in spending by the typical American family. The article pointed out that across the board, Americans have increased their spending. The article attributed the increase to the improved U.S. economy, the new tax law and the favorable job market. The other article I read talked about how charge card debt and auto loans are increasing along with the rate of default. What is troubling to me is that unfortunately, Americans are not saving more or putting away more for their retirement.

There’s no doubt that the economy and the job situation have improved. After all, for the last three months there are more employers that have job openings than people who are unemployed. As a result, people are more secure in their jobs than they’ve been in a long time. It is also true that because of the new tax law, people are finding they have more money in their paychecks. However, Americans have not learned their lessons from the past. As opposed to taking the extra money in their paycheck and investing it, Americans once again, are spending more and increasing their debt level. I certainly have no problem with someone rewarding themselves for their hard work; however, we have to be adults with our money and do with it what is responsible. Although our economy has improved and people have more security in their jobs, the number of people that cannot afford to retire has not declined. My recommendation is that before you spend your extra money, you first consider your personal financial affairs. In that regard, as opposed to spending the extra money, here are a couple of thoughts you should consider.

The first area you should consider putting extra money in is an emergency fund. As far as I’m concerned, everyone needs an emergency fund of money they can tap into in time of need. My general advice is that people keep three to six months of living expenses in an emergency fund. Therefore, if it costs you $5,000 a month to live, you need between $15,000 and $30,000 in an emergency fund. I don’t care how secure you are in your job, things happen. The emergency fund of money is to protect you so that you do not have to tap into your investments in times of need, nor do you need to incur additional debt. I recognize that emergency money is not going to get a very good rate of return, because inevitably, you should invest it in money markets and CDs which are not paying much. However, having an emergency fund is an essential building block in keeping your financial house in order. Therefore, before you increase your spending, establish an emergency fund of money.

Before you increase your spending, I also recommend that you save for your retirement. My general belief is that if you’re working, you need to save at least 10 percent of your earnings for your retirement. After all, the question you have to ask yourself is if you retire in your mid 60s, do you have enough resources to last you 30 years. If you don’t, you need to increase the amount you’re saving for your retirement. I’ve always said that we live in the greatest country in the history of the world, but there’s nothing worse in this country than to be old and poor. When you’re old and you don’t have resources, you have very few options. When you don’t have options, it also means that the quality of your life will suffer. Therefore, before you increase your spending, look for ways to save for your retirement.

A few ways to save for your retirement would be to pay off high interest rate debt like charge cards, increase the amount you’re contributing to your 401(k) or other salary deferral programs, or consider starting a traditional or Roth IRA. I cannot stress enough how important it is, no matter what your age, to save for your retirement. Retirement is not like it was 50 years ago where you could mostly get by on your Social Security. We live in a time where if you’re going to maintain the quality of your life, you must have a rising income throughout your life, and the only way to do that is to save, save and save more for your retirement.

I recognize that you work hard and you’re entitled to reward yourself. However, it is important that you learn you have to live for today and save for tomorrow. If you only live for today, your tomorrows are not going to be so good, and that is not what you want.

Good luck!

If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.