Savings Archives - Abnormal Money

Saving as a Question of Liquidity: How to Save Your Money

I tend to agree with the notion you should save around 50% of your income. I’m not entirely convinced on what percentage of that we should be saving pre-tax and how much we should be saving post-tax.

It largely depends on your age and future plans. I’ve been thinking about some guidelines to determine what percentage of your 50% savings rate you should allocate pre-tax versus post-tax.

Goals Determine How You Save

Think about your goals in the next 10 years, if you decide to either buy a house or go to graduate school I urge you to reconsider your pre-tax savings rate.

Let me give you an example. Until recently I was saving 30% of my gross income and putting it towards my 401(k). This reduces the amount of taxes I paid in total, but considerably reduced my take-home pay. The only downside to investing in a 401(k) is you cannot withdraw from it without penalty until you’re 59 1/2.

Save for Graduate School

If you’re attending non-sponsored graduate school within the next 5-7 years I would keep your pre-tax savings to under 20%. I personally think any chance to reduce debt is worth it. I already know the argument is that you can earn high returns investing that money and just take on relatively “cheap” debt to maximize your potential wealth.

I value the freedom that comes with living with no debt more than I do excess returns. It is such a relief working every day and saving for retirement knowing that you are not a slave to debt. Sure you have to work to provide for yourself and your family if you have one, but that is entirely under your control.

If you attend graduate school full time you have to consider living expenses while not earning an income. Saving 50% per year should equate to a year’s worth of living expenses. Of course, that 50% savings will not be liquid if any portion of it is saved in a 401(k) or Roth IRA.

Let’s say you save 25% of your income in a 401(k) and Roth IRA. That leaves you with 25% to save that is liquid. This is the amount that you can plan on using when you attend graduate school. The savings rate is every year you save 25% you save 6 months of expenses.

For simplicity’s sake let’s say the location of your graduate school has a comparable cost of living to where you currently live. For a full-time 2-year MBA program you should save enough for living expenses in 4 years.

For a full-time 3-year law program you should have enough living expenses saved after 6 years.

If you can swing a sponsored full-time or part-time program you’ll be even better off!

Save for a House

A common goal for many is to own a home around the time they’re 30. If you’re saving towards this goal you want to make sure the savings you have are liquid and easily accessible. We can do the same exercise as above, except using time as a measurement of living expenses isn’t really relevant.

You want to save up a large enough down payment, typically 30% of the purchase price.

Determine what your goals are before maxing out your 401(k), it might not be the best move for you.

Downside To Saving Cash

One of the main drawbacks to keeping a lot of cash is inflationary pressure. In our current environment (around 9.1% inflation), if you’re not growing your cash it’s lost 9% of its value in the last 12 months.

So the cost of liquidity is essentially the rate of inflation plus the performance of whatever you would have invested that money in, let’s say the S&P 500 index to keep it simple.

So we’re looking at inflation of 9% for the past 12 months and the market is down around 8%. So we would have been better off not investing in the past 12 months but remember that no one can predict the market.

The market has averaged a positive 10% return since 1957, this just happens to be a down year.

Make sure you understand the opportunity cost of holding savings in cash reserves. Sometimes it’s worth it to bet on yourself by investing in education. Sometimes you need liquidity to invest in another asset class.

Don’t underestimate increasing your earning potential. Aggressively saving is not enough.

Cash is King?

I think we tend to underestimate the power of liquidity. Having cash ready to deploy in assets that have been dragged down by the market is a powerful force. So is the ability to invest in yourself to improve earning potential and career prospects.

Think twice before you have all of your cash tied up in ill-liquid holdings.

What level of liquidity are you comfortable with? Let me know what you think.

Career Kickstart: How One Crazy Year Gave Me Valuable Lessons

Make sure you take the time to reflect.

I started my career in supply chain after graduating in May 2021 with a bachelor’s degree in Supply Chain Management from a state school. When I first got to college I only vaguely understood what my major was. When I graduated supply chain news dominated major news networks.

I’ve been working in the auto industry for a year and moved away from my home state to the midwest. In all honesty, have been working my ass off. After one year I thought it would be relevant to reflect on my time so far and the lessons I’ve learned since joining the professional world.

Make Saving Intentional

Having a salary and a bit of disposable income was a little frightening at first. After using a budget to purchase some essentials (lease for an apartment, furniture, dishes etc.) I was suddenly left with a respectable inflow of cash into my bank account. I lived with my parents for a couple of months after graduating and worked remotely so I was able to save up but more importantly, see how others were spending their money.

Some people I saw were spending with what I thought was reckless abandon. Really nice apartments in new cities, shopping sprees, jetting off on vacations, really celebrating graduating and a new job. Good! Graduating and getting a good job is deserving of celebrating. I myself am 50/50 in terms of financial behavior. I am 50% frugal from my dad, and 50% prone to spending from my mom.

That’s why I knew I needed to just go ahead and save some amount of my gross salary and then spend the rest weekly within reason. I’ve read lots of personal finance blogs, and books, and talked with my dad so after twiddling around with my allocation I’ve settled on the following.

48% seems like a lot of your gross salary to save and it is! That’s why I just go ahead and have these percentages moved into the appropriating brokerage and savings accounts before I even touch the money. I pay myself first and then live within my means for the rest.

I recommend saving at least 50% of your income as a goal, it’s tough but in the end, it will be worth it.

Investing Is A Waiting Game

When I started contributing to my 401k the markets were at near highs. Within a couple of months inflation had skyrocketed, Russia invaded Ukraine, and the markets took a nose dive. I was aware of the fact I was getting in at the top and therefore knew that I would be in for some pain in the short term.

The S&P 500 is down almost 20% in the last two years. It hurts to consistently contribute money to my accounts as the market keeps plunging. I recently increased my 401k contribution while the market continued to have one of its worst first halves of the year in recent memory. I’ve been reassured by Benjamin Graham’s story of Mr. Market. The market operates on emotion and there is plenty of reason for the world’s investors to be pessimistic due to world affairs.

Right now it’s painful to invest, but the history of stock markets, says that it will be worth it in the end. That’s not to say the status quo cannot change. In the meantime, I’ll be periodically reviewing my investment decisions.

My Career Consumes Most Of My Day

To be completely honest I severely underestimated how much time I would have to devote to my job to excel. I’m more or less available between 5:30 AM and 6:00 PM every day. Occasionally I have to work weekends as well. Add that to the social hours to meet colleagues and I’m exhausted at the end of the day. That’s part of the reason I stopped writing for this blog, the shock was a little too much for me to handle.

The supply chain doesn’t sleep, especially for manufacturing firms. The sheer amount of invested capital necessary to produce millions of products every year necessitates those same machines running for as much time as possible. The result is they need a constant stream of components to assemble essentially 24/7. In the corporate sense you never really leave work at work although I’ve gotten a little better at ensuring work-life balance.

Supply Chain Has Turned The World Upside Down

Now more than ever the general public is aware of the supply chain for their products. More often than not they are blaming it either for its price or the product’s lack of availability. This level of visibility is driving companies to really take a look at their supply chain and decide if it can be improved.

I’m relatively comfortable with my career choice because of this, I expect supply chain professionals to be in demand for quite a while. One day I might want to experience a different role and different function, but I have no qualms about contributing to improving supply chains for the foreseeable future.

If you can choose a career that you enjoy AND is in demand. That is key to securing a healthy income and enjoying your job as much as you can.

Understanding Your Job’s Financial Implication Sets You Apart In Your Career

Many professionals in the supply chain are incredibly good at their job. The meat and potatoes of the supply chain. Monitoring inventory levels, working with external parties such as carriers and suppliers, production scheduling, etc. I’ve noticed a common theme among those I’ve seen be promoted and people already in positions of leadership.

They are all able to explain supply chain implications in regard to the company’s bottom line. Being financially literate is key to assuming more responsibility at your company and in turn, growing your salary.

All in all, one year in has been tough but rewarding. I’m excited for year two!

The Market Shows A Positive Future

Even though many places in the world are still feeling the effects of COVID-19, the US stock market has seen tremendous growth.

US Stock market index August 2020 to August 2021 — Performance of the US Stock Market in the past year

After hitting a low of around 26,500 points in late October, it has rebounded up to 35,000 points as of today.

Keep in mind that all of this happened during great times of uncertainty and restrictions being imposed in many places around the world.

The continual surge of the market even during these times tells me that companies and money managers are confident that the worst of the pandemic is behind us.

Recent Earnings Beats

Some companies have really beaten their earnings estimates this quarter.

In fact, 88% of S&P 500 companies who reported earnings for Q2 2021 beat their EPS and revenue estimates!

It’s telling to look at the industries these companies are in because it’s a good indicator of what consumers are spending their money on.

Here’s an example of two companies that stood out.

Ralph Lauren

Take Ralph Lauren (RL) for example. The earnings estimates were $0.89 EPS, but RL recorded $2.29 EPS.

There are some other interesting notes from their earnings report. Their digital e-commerce capabilities saw an 80% growth YOY.

Ralph Lauren achieved their highest gross margin since 2014. Revenue is expected to grow 25%-30% as in the next year.

In Q2 RL’s net revenue increased 176%. Including a 278% increase in physical stores and a 51% increase on their digital platforms.

These strong performance metrics don’t signal a consumer base that believe they will be staying inside and quarantined for work.

This means that many people receiving signs that even if they won’t be returning to the office full time that they are expecting to go out and dress up.

Spirit

Spirit (SAVE) is a budget airline operator that prides itself on being a low cost choice for people who want a vacation.

They managed to beat their earnings with a loss of $(0.34) compared to estimates of a loss of $(0.81).

These figures are adjusted EBITDA earnings per year, which leaves out cash flow activities that are invested back into the company to generate positive future cash flows.

Some of the investments Spirit is making include investing in new routes to accommodate increasing south Florida travel.

Spirit is making investments because more people are traveling now and looking to travel in the future. A good sign for the markets going forward.

Consumer Market Sentiment

I believe these earnings beats and the general upward trend of the market are the result of a couple of possibilities.

Consumers Are Spending At Normal Levels

In some states especially in the Southeast United States, there are little to no lockdowns or restrictions. I would say most consumers in these regions are spending how they spent before the pandemic began.

These consumers are probably contributing to some of the overall positive consumer sentiment, especially in popular vacation locations such as Florida.

However this region is not reflective of the entire nation, and it is a different story in other areas in the United States.

Consumers Are Expecting To Spend At Normal Levels Soon

In other areas where gatherings are still more restricted, the e-commerce capabilities of almost every consumer retail brand has allowed consumers to continue spending on things like clothing.

This is in spite of the fact that their areas might be under restriction.

A big sign of this is Ralph Lauren’s e-commerce growth that I mentioned above.

Consumers are spending with the expectation that their lives will be make to normal sooner rather than later.

They have faith that most restrictions will be lifted and they will be able to spend their money where they want and go where they want.

You don’t buy more Ralph Lauren clothes if you are expecting to stay in and never go out to restaurants or bars or parties.

Consumers Plan To Disregard Restrictions Or They Spend To Feel Better

The last assumption can go either way.

Consumers might be tired of restrictions and plan to go about their normal lives in places that don’t follow the restrictions.

Another option is that consumers are buying more clothes as a way to cope with the fact that they believe restrictions will continue due to the Delta variant.

Think of this a little bit of retail therapy.

I think all of these possibilities are potentially true, and there are probably consumers who are behaving in all of the ways I discussed.

At the end of the day it doesn’t really matter why consumers are spending more, it is beneficial to the markets that consumers are spending more.

Where Is This Spending Power Coming From?

Where is all of this discretionary consumer spending coming from during a pandemic?

I think some consumers have started using a budget!

Increased Savings Rate

The Kansas City Fed published a very telling report titled “Why Are Americans Saving So Much of Their Income?”

In December 2019 Americans were saving 7.2% of their disposable personal income.

By April 2020 the savings percent increased to 33.7%!

The Kansas City Fed issued a follow-up piece in April 2021 that looked at the following savings rates post April 2020.

They found that the savings rate has stayed around 14% since April 2020. Americans have been saving a lot more during this pandemic and are eager to spend it.

Federal Stimulus

Let’s assume that the average American family is a couple with two kids and a household income of $70,000.

So in the first round of stimulus checks this family would have received $3,400.

The second round would equal $2,400.

Finally the third round would include $5,600.

A grand total of $11,400 would have been given to this average family during this pandemic.

Theres no doubt some of this as gone to essentials such as rent and food, but the government’s reason for direct relief was to stimulate the economy and prevent a recession.

If the broader economy is stimulated, it makes sense that the market will usually follow suit.

There is no doubt a chunk of this relief has gone towards consumer discretionary items, combined with the higher savings rates can attribute to the extra cash a lot of consumers seem to have during this pandemic.

What do you think about the upward trend of the stock market? Are companies and consumers being too bullish? Or do you think they’re bearish and I got the analysis wrong? Let me know in the comments.

Author Bio

Drake is a freelance writer who’s interested in history, economics, art, & beer. Drake graduated with a degree in Supply Chain Management and began working at General Motors. He writes about popular personal finance topics and shares his journey. Make sure to check back for more posts on Abnormal Money.