The Case for Saving Twice As Much Money

This article has virtually nothing to do with my other pieces, except that its purpose is to help you... so please give me the benefit of the doubt for a moment.

Since 2008, interest rates have been extremely low. This means that any money you save is earning very little... far less than you need to be able to buy a house, send your kids to college, or retire comfortably.

Think back... what's the first lesson anyone taught you about saving money? It was probably the value of compound interest, that if you could save $100 today and let it earn interest for 30 years, then you would have a big pot of money. 

But if there is no interest to speak of, all that wisdom falls apart.

It's now been eight years of tiny interest rates, with no end in sight. The Wall Street Journal recently reported that "government bond yields in Japan, Germany, and the U.K. notched record-low levels... dragged down further by months of central bank buying. The 10-year German bund yielded as low as 0.023%."

Most of us work four or five decades. If you are over the age of 30, you just lost almost a decade of savings income. You won't make it up. The way things look, you might lose another decade... or more.

To give you a specific example, I used the Bloomberg Retirement calculator. If a 40-year-old had no savings and wanted to retire at age 67 with $1 million, he would have to save $15,697 a year, assuming a 6% rate of return.

But what happens when you keep all the assumptions the same but reduce the rate of return to 1%? The same person has to save $32,445 a year, or more than twice as much.

The moral of this story is: double your savings.

My assumption is that you were already saving a reasonable amount of money each year, reasonable, that is, for a world in which people earn 4, 6, or 8% on their savings.

I know what you're thinking. This is impossible. How are you going to live the way everyone else does in your neighborhood? You aren't. Most of the people in your neighborhood - in every neighborhood - are spending beyond their means. That's what motivated me to write this article; most professionals are living in a state of delusion.

You have to save enough that you will be okay even if your savings do not earn interest. This is a lot of money. To save this much, you will have to significantly scale back your lifestyle, while people around you continue to ignore reality and spend as though they can afford to keep spending.

What's worse, individuals and our economy as a whole now have opposite goals. The best individual strategy in an era of non-existent interest rates is to reduce your spending and maximize your savings. But the best thing for our economy is for people to spend more; that's the only thing that will stimulate our economy and eventually raise interest rates again.

Unfortunately, neither one of us can solve the global economic challenges. That leaves us with only two options:

1. Be conservative, and save more - even if it is very hard to do this.

2. Deny reality.

Hint: the reason I put #1 first is because it is the better option.

Bruce Kasanoff ghostwrites articles for all sorts of business professionals around the globe.