Saving for a Rainy Day

Everyone believes it’s important to save for a rainy day, right? While it’s hard to find someone who doesn’t know that they should save for the future, we don’t always act on this knowledge. In the summer of 2008, I studied the financial beliefs and behaviors of 422 people from all walks of life, income levels and net worth levels. My study reveals some striking differences between the beliefs of the wealthy and the beliefs of those who struggle financially. Of the 72 money beliefs I studied, one statement alone explained 75 percent of the difference between those who are wealthy and those who are not: “It is important to save for a rainy day.”

It is not that the less wealthy didn’t believe it is important, they just were less likely to “strongly agree” that it is important. This is a critical difference. Wealthier people believe much more passionately about the importance of saving, and are more likely to save and do so aggressively. Eventually, they acquire more wealth. Even with the most modest of incomes, with the power of compound interest a habitual saver can amass hundreds of thousands or even millions of dollars in their lifetime.

This difference illustrates how critical it is to be devoted to a savings habit. Financial prosperity is not about how much money we make; it is about how much money we save. In my study, those who were less likely to “strongly agree” that it’s important to save for a rainy day were much more likely to overspend, carry credit card debt and have gambling problems. They were also more likely to be in their late teens and early twenties; precisely the time where savings can lead to wealth in the most dramatic way.

I know what you’re thinking. Saving money sounds good, but times are tough. How do you save for a rainy day when it is already raining? Frankly, it is never easy to start a new habit. In 2006, during one of the most prosperous times in human history, the average savings rate in the United States was -0.5 percent, the lowest since the Great Depression. Since then, despite soaring unemployment, pay cuts and financial losses, the average American has increased their savings rate by 1,000 percent—currently it is around 4.5 percent. This shows what we can accomplish when we decide it is important enough.

Establishing a savings habit is perhaps the most important thing you can do for your financial health. And, modeling this behavior for your children is one of the most important things you can do for their future financial health. It’s okay to start small, even if it is just pennies a day. Commit to paying yourself first from every bit of money that comes into your possession. Write the first check from your paycheck to yourself. Increase the percentage as you can, with the goal of saving 10-20 percent of your income for your financial freedom fund.

Whether it is tomorrow or months from now, the sun will break through the clouds again and the rain will stop. With your habit of saving firmly in place, you will be ready to make the most of it.