Thursday, June 28, 2007

Beat the Great Depression by Saving Money!

Posted by Janine Bolon

The headlines were blaring at me: ”Savings at the Lowest Rate since Great Depression.” My husband handed me the financial section of our local newspaper as I was finishing up the breakfast dishes last week. “Oh no,” was my reply as I read the truly negative news. It seems we Americans have hit another record and, unfortunately, it isn’t one that I’m very proud of. For the second time in 73 years we are now saving in the negative numbers. 2006 has the dubious honor of a -1% savings rate. Yikes! On the average we are now spending more than we earn as a population. 2005 had us saving at -0.4% rate and what is even worse is there have only been two other years that we have saved so little as a country and those were 1932 and 1933.

During the Great Depression, however, we were saving less due to the loss of jobs. One out of four households had no work and these families were tapping into savings in order to make ends meet. Food and rent were the major reasons for their decreasing balances. For 2006, what are the reasons for the negative numbers? A good economy! Believe it or not. I was stunned to read that the Associated Press article was listing low interest rates were the primary reason for this decline in our savings accounts. It seems at times like these it is more attractive to borrow money to make purchases by refinancing one’s home! The Federal Reserve has driven rates down to the lowest level in more than 40 years so is it a wonder folks are jumping at the ability to get a loan? These lower interest rates have caused a major increase in housing purchases, which has caused an increase in housing prices which has, in turn, increased the number of mortgage refinancing so people can have more money to spend on things. Eeek!

There are problems on the horizon if this sort of spending continues. At some point the money will have to be repaid. Remember that the boomer generation is just starting to retire and pulling money from their savings to compensate for the lack of paychecks. This is adding to the negative numbers we are currently seeing and the number of retirees is going to increase over the next decade.

So, what do you do? I mean, all this negativity about saving and the consequences of excessive spending is enough to make the stoutest heart want to grab the wallet, head to the mall and SPEND! Here is what you do. Make sure that at least 10% of your income is going directly into an IRA, 401k or if you are self-employed, pick one of the solo401k options that allow business owners to invest income in a retirement vehicle. It is important that you don’t give up your future due to the lures of today. If you are unable to save 10% of your income then start looking at what you are buying on a daily basis that can be handled a different way.

We are NOT talking about deprivation here. If you are buying a cup of coffee at your local coffee shop every morning on your way to work, then I suggest you buy a thermos and make your coffee at home and take it to work with you. If you buy a trinket or little “something” every time you checkout at your local food mart then I suggest that you find another way to fill that emotional need. What is important is to ask yourself this question; “Why am I buying this?” It will amaze you how many times the answer is something out of a 3-year-old’s mouth. “Because I want it!” or “Because I’m mad/upset/irritated!” Often, many of my clients tell me that they get so depressed about their credit card bills they go out shopping to feel better! Talk about your vicious cycles, right?

Here are some tips to avoid this sort of trap:

1-Every time you avoid buying a trinket or item at checkout, put that money into a savings account. One of my clients told me that by the end of one week she had $112 in her checking account. Talk about an eye opener. She knew that she had been spending money on stupid stuff, but had no idea it was THAT much in a week!

2-Track all your expenses. Yes, all of them. Buy or make yourself a little notebook that you carry around with you all the time. Every time money or a credit card leaves your wallet, record the expense. Over a month of recording you will start to see patterns in your spending that are impulsive, not satisfying in the long run and destructive to your mental health. Eliminate those expenses or find low cost alternatives so you don’t go into a deprivation/splurge cycle.

3-Track your savings. Keep an eye on your savings account and watch it grow over time. When an emergency occurs or an unplanned expense hits, pull the money from your savings account and put that credit card back into your wallet. If you don’t have the money saved, then it is simple, don’t buy it!

4-Make financial goals. This is the single most powerful exercise anyone can do, but is the most often neglected. By making REALISTIC financial goals you will achieve them. What is necessary in making goals is to have a reason for them. Saying that you want to have $5,000 in a savings account by this year’s end is not enough motivation for me. I have to have a reason for that $5,000. Before I had an IRA in my name, I was totally committed to saving money so I could open it and to make sure I could fund it every year! Why? Because I had a picture in my mind of me old and grey and not able to work anymore, the thought of living with my children or being a burden to them is enough to make me save money for my IRA.

5-Affirm your financial goals. Instead of telling yourself or your loved ones, “Sorry, honey, you can’t have that we don’t have enough money.” Start affirming a positive financial picture. A better way to affirm abundance of money is to state, “I can’t have that, because I spend my money on different things.” This keeps the affirmations out of the negative and starts you to thinking about the purchases that really matter. Then, your not just throwing your money away.

Take a look at your savings account balance as it stands today. Then, make a financial goal that is realistic for how much you want in that account in three months, then six months and then the end of the year. Write these numbers down and then post them conspicuously in your home. You will be amazed how those numbers keep floating around in your head and how they keep your fingers from grabbing your wallet the next time you pass the candy aisle!


Elwood said...

Thanks for this. I know it is a year old, but even more true today.

The Money Muse said...

Thanks for reading and keep the comments coming. Much financial advice is good most of the time. Bear or bull market, right?