With the winter holidays approaching, you might be bombarded with ads enticing you to spend your hard-earned money. But this isn’t just a seasonal issue. In general, Americans tend to be spenders, particularly compared to how people approach spending vs. saving in many other cultures around the world, explains Clark Howard, a money expert and personal finance media personality, in a recent YouTube clip from his “Save More, Spend Less” channel.
In middle-income countries, he says people typically save around one-third of their incomes. So if they made $1, they’d save around $0.33. Americans, however, typically save only $0.06 of every dollar earned, explains Howard, albeit with some fluctuations over time. The personal savings rate in the U.S. — the percentage of money left over after taxes and expenses — for October 2023, for example, was only 3.8%, according to the Bureau of Economic Analysis.
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American culture typically promotes having fun today while letting tomorrow take care of itself, notes Howard, but that can lead to unfortunate consequences. For example, you might end up in debt or not saving enough for retirement — or both. To break the habit of not being a saver and to start building your wealth, consider the following two money rules from Howard.
Start Saving at Least One Cent of Every Dollar You Make — No Matter What
While the average American often only saves around $0.06 of every dollar they make, many people are in an even worse position by spending more than they make. Even at very high incomes, you’ll find that many people still aren’t saving money, explains Howard. To break this cycle of spending however much you make, start by saving one cent out of every dollar you earn, even if you currently have a deficit or debts, says Howard.
Six months later, save another penny out of every dollar, and six months later do that again, and so on and so forth, he suggests. If you do that, in five years, you can go from having no savings to saving 10% of your income, which is a great baseline, says Howard.
These savings can go into whatever vehicle you’re comfortable with, like a savings account or retirement account, he notes. The point is that you’re learning to live on less than what you make while becoming a person who’s a saver, not just a spender.
Take Advantage of a Roth IRA
Not only can a Roth IRA help your finances now, but it also can help when it comes to retirement. By getting comfortable living on less money, you might someday need less money to afford retirement, explains Howard. So, that mentality might lead to benefits like helping you retire sooner than you could otherwise.
Either as part of your savings plan to put away one cent of every dollar, or in addition to that, take advantage of a Roth IRA account, suggests Howard. These accounts help serve as an equalizer in terms of retirement savings tax advantages not being as tilted toward the wealthy, he adds.
Single tax filers with less than $138,000 in modified adjusted gross income (AGI), and married joint filers with less than $218,000 in modified AGI, can contribute up to the limit of $6,500 in a Roth IRA for tax year 2023 (or $7,500 if you’re 50 or older). A phase-out range applies for higher incomes.
By utilizing a Roth IRA, you can put post-tax dollars into your account at a time when you might have relatively low income tax rates. Then, that money can grow tax-free and be withdrawn tax-free once you meet certain eligibility requirements, such as being at least 59 1/2 years old. By that point, your income might be much higher than it is now, so being able to withdraw money tax-free can be a big advantage.
Altogether, by building a habit of saving money and contributing to a Roth account, you can create a new cycle, says Howard. Instead of being someone who’s struggling to get ahead, you can reorient your finances toward building wealth.
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This article originally appeared on GOBankingRates.com: Clark Howard Says You Should Use These 2 Money Rules To Build Your Wealth