The Dollar Stretcher : savings

Savings In an Uncertain Economy

Gary — Tue, 09 Jun 2009 13:10:00 GMT

At a time when unemployment has jumped from 5.5% a year ago to 9.4% in May, 2009 it's understandable that people are concerned about their jobs. source: Bureau of Labor Statistics

And their response has been predictable. The personal savings rate (personal savings as a percent of disposable personal income) was 5.7% in April, 2009. That's a 14 year high. source: Bureau of Economic Analysis

The same BEA report indicated that personal consumption expenditures (PCE) declined by 0.1%. In other words, many of us have shifted from spending money to saving money.

That's supported by statistics from the Federal Reserve. "Consumer credit decreased at an annual rate of 7-1/2 percent in April 2009."

So it would appear that much of the money that's not being spent is going to pay down credit card balances.

Under normal circumstances that would be the right thing to do. Pay down the most expensive debt first - i.e. the loan that charges the highest interest rate.

But, for many families these are not normal times. If you are concerned that your income could be cut or cut off, you might need to consider an alternative plan.

Let's look at a situation where your income is cut and is not sufficient to meet all of your bills. And, let's assume that you have a mortgage, one car loan and various credit card balances.

After a cut in income, the first thing you should do is to talk with anyone that you owe money to. Explain that your income has been cut and you need an adjustment to your payment schedule. Some companies will work with you. Others will not.

Next, you need to decide in what order you'll pay your bills. You already know that your income is not high enough to pay all the bills. So someone will not get paid.

Naturally, you'd want to pay the most important bills first. That would be your mortgage. Right behind it would be groceries to feed your family. A roof over your head and food in your tummy are pretty essential.

OK, now for the challenging part. The money that's left isn't enough to cover the car and credit card payments. What should you do?

What would happen if you fail to pay? If you don't pay your auto loan after a few months they'll repossess your ride. That could make job hunting more difficult. Not a pleasant thought.

On the other hand, if you don't pay your credit card bills you can apply for credit counseling. Typically they'll reduce your interest rate and lower your minimum monthly payment. The bad news is that your credit score will be negatively affected and you'll be expected to quit using the cards.

Not being able to use credit cards will be inconvenient. You'll need to use cash to buy groceries and other essential items. But, that can be done.

So logic tells us that it's wisest to pay your auto loan before your credit card bills. But, what does that have to do with today's extra savings at a time when you are able to meet all your obligations?

It may not be best to use that extra income to pay off the most expensive (i.e. credit card) debt today. The reason is simple. In a crisis you'd much rather have that extra money tucked in a savings account or CD so that it could be used to make mortgage and car payments later. The more money you have in savings the longer you can hang on with a reduced income.

There's a cost to this strategy. Instead of retiring 14% credit card debt, you'll be earning 1 or 2% on the savings. So it's fairly expensive insurance.

But, if you think that there's a good chance that you could see a significant cut in pay or lose your job, it might be something to consider until the danger passes. Remember that if you lose your job you won't get a 'do over'. Having some money in savings could be essential to your family's survival.

They say that extraordinary times call for extraordinary measures. This might be one of those times.

Keep on Stretching those Dollars!

Gary

The Best Time

Gary — Mon, 04 Aug 2008 19:13:00 GMT

Saw an interesting phrase last week. It was supposedly ancient Chinese wisdom. Went something like this. "The best time to plant a tree is ten years ago. The next best time to plant a tree is today."

The more you think about it, the truer it is. If you wanted shade or an apple today it would have been good to have planted a tree ten years ago.

What does eating an apple in the shade have to do with personal finance? Good question! Let's ponder some of the answers.

Retirement is a great example. The best time to start saving for your retirement was years ago. Maybe many more than ten years ago depending on how old you are. And maybe you didn't start putting money away in a pension plan, IRA or 401k way back when. So you can whine about not having any savings now or you can plant your tree today.

Paying off debts is another one. I should have started paying down those credit card balances back when I got that raise. Or when I had that stretch of overtime. But I didn't. So now I owe just as much as I did back then. Probably too late to do anything about it. Guess I could give up and just plan on being in debt the rest of my life. Then again, maybe if I start today it won't be too long before I've made a dent in those balances. Might even get them paid off in the next few years.

What about taking that course to improve your job skills? Or cleaning out that closet or garage? Or taking that cooking course so you don't visit restraurants so often?

Wouldn't be surprised if you come up with a whole list of similar ideas that apply specifically to you and your family.

So don't moan that you didn't start when you should have. So you didn't plant the tree ten years ago. That can't be changed. But you can plant the tree today. And have the joy of watching it grow over the next ten years!

Keep on Stretching those Dollars!

Gary

A Little Security

Gary — Wed, 30 Jan 2008 19:28:00 GMT

A number of years ago I read a story about children who were found in an orphanage at the end of World War II. They had suffered from a lack of material things during the war. They were undernourished and dressed in rags. Once the town was liberated material things were still in short supply, but those in charge made a special effort to see that the children had enough to eat and proper clothing. Yet, weeks went by and the children didn't seem to be doing any better. They weren't gaining weight. They still suffered from nightmares. The adults weren't sure what they could or should do. Finally someone got the bright idea to give each child a biscuit before bedtime. If they ate the biscuit, they were given a second one to hold during the night. The effect was almost immediate. The children began to sleep better. They started gaining weight. More and more smiles were seen.

When asked about it the adults surmised that the even though the children were well fed now, subconsciously they weren't sure that they'd have anything to eat tomorrow. After all, there world was fine before the war came. The simple fact that they went to sleep with a biscuit in their hand or beside them on their pillow told them that they'd have something to eat tomorrow. Just that little bit of security made all the difference to them and changed the way they saw the world.

I think that adults are like that, too. If we don't know how we'll make our next car payment there's a heightened level of stress. Add a ballooning credit card balance and we'll begin to lose sleep (just like the kids). But give us a small savings account and we sleep like babies. It's a lesson that we all could benefit from learning.

In this week's Dollar Stretcher you'll find a story that shows how one generation can pass a biscuit to the next generation. You'll find it at <http://www.stretcher.com/stories/08/08feb04f.cfm>. Now that's a real gift. Passing on a sense of security to your children. It doesn't get much better than that.

Keep on stretching those dollars!

Gary