Personal Savings, Debt & Credit

Personal Savings, Debt & Credit

by: Dave & Nita Anand

According to the World Bank report of 2010, Chinese people saved the most that year by putting away 38 percent of their earnings as savings; the reason given is China has no national safety net.

India came in second at 34.7 percent due to their accelerated Gross Domestic Product growth, followed by Turkey (19.5 percent), Switzerland (14.3 percent), Ireland (12.3 percent), Britain (7 percent), Brazil (6.8 percent), the United States (3.9 percent), Japan (2.8 percent) and Australia at 2.5 percent. Take note that the United States is not in the last place, whereas, Japan’s past stellar habits of 15 percent or more savings have taken a hard beating after two “lost decades” with stagflation (Stagnation + Deflation) and near zero interest rates to dig the economy out from a deep hole (sounds familiar).

Interestingly, America’s personal savings rate was 2.1 percent in 2007 before the financial debacle of 2008. It went up to 5.9 percent in 2009 and then dropped to 3.9 percent in 2010, which implies when economic conditions are tough, the rates of personal savings rise quite drastically, as does unemployment. This then bottles up the economy since people reduce or stop spending for fear of running out of cash.

It is a vicious savings cycle -- higher personal savings are required to help with new investments that create more jobs which result into more disposable cash, the spending increases, good times roll, bubbles buildup, the savings rate goes down affecting economic expansion which can go flat with a recessionary-hammer, and the cycle of savings -- repeats again.

Savings Strategies

Financial experts will tell you that a sure way to succeed in your personal money management is to follow the 50:30:20 formula; Meaning, spend 50 percent of your earnings on the “must-haves,” 30 percent on fulfilling your “wants,” and steer the remaining 20 percent to lower the debt, as well as building an old-age nest.

It takes strong determination and discipline to adhere strictly to a family budget that must address a variety of expenses such as: a house with its operational/maintenance/repair costs; car with its operational/maintenance/ repair costs; food; clothing; medicine and medical costs; communications (mobiles, landline, Internet); entertainment (TV, movies, restaurants); vacations; college;  and so on. The first step in all of this is to define what comprises your must-haves and wants lists and then apply the 50:30:20 rule to them.

There are number of smart ways to bring down expenses, including but not limited to ones described here. Try to have homeowner’s and auto insurance policies from a single insurance company and elect for high deductibles ($500, $1,000 or higher) to reduce premiums and force cautiousness that will prove beneficial in the long run on all matters. Buy groceries and big-ticket home items from a well-established warehouse like Costco that offers great discounts; same applies to clothing, particularly clearance sales before and after major holidays.

Utility bills keep presenting surprises, especially with heating oil and gas pricing taking cyclical hits. Buy with cash to realize discounts in both heating oil and gas re-supplies. Finding a cheaper heating oil vendor in your area and using higher rated insulation with weather stripping will save more than 10 percent in monthly bills. Cheaper and good quality gas is available at Costco and other similar warehouses.

Building an old-age nest with a company’s 401(k) plans is a good idea as many have matching features. If one isn’t available, one must open an IRA, but have someone manage it for you (e.g. your accountant). Magazines like Forbes and Fortune put out best performing mutual funds periodically; it is a good idea to gain insight from them on how to grow your nest with jumbo-eggs even during hard times (e.g. mutual funds such as Oppenheimer, Fidelity, etc.).

Entertainment and communications should fall in the “wants” list. Bundled TV-packages and mobile-packages is the way to reduce costs associated with these. Be aware of missing channel or two in the TV-packages or the missing roll-over minutes or unlimited texting in mobile-packages that service providers trick you purposely to fatten monthly bills.

Look for discounts offered by many Zagat-rated restaurants in your local media and depending on how often one dines out, the savings would be substantial, while satisfying your epicurean desires.

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Issue of Debt/Credit

Benjamin Franklin once said: “Rather go to bed without dinner than rise in debt.” Budgeting experts will advise you that debt is similar to death, especially if one has developed the cancer of credit cards.

Definition of Debt: An amount of money borrowed by one party from another (This arrangement is under the condition that the loaned amount is to be paid back at a later date, usually with interest and typically, at a steeper interest rate in the case of a credit card company).

If Americans in this easy-credit nation were to take heed of Thomas Jefferson’s saying -- “Never spend your money before you have it” – we will not be a country weighed down by a mountain of personal debt (The National Debt issue requires an essay of its own to do justice to that subject).

According to the Federal Reserve, the total U.S. revolving debt (the kind we amass on our credit cards and lines of credit), soared each year between 2005 and 2008, before hitting a high of $957.5 billion in 2008. In 2009, it fell to $865 billion, and continued to fall through 2010. Personal debt is like a yo-yo going up and down with the economy.

Simply stated, there are two types of debt. Good debt is represented by mortgage and student loans and all the rest is bad debt, with debt from credit cards labeled the worst debt since it carries deadly interest rates. Whether good or bad, the lower the debt one has, the better it is.

Financial experts use two terms in determining the amount of debt one can afford and handle. “Front-End-Ratio” should never exceed 28 percent – it is total monthly housing cost divided by total gross monthly income. The “Back-End-Ratio” is total of all debts (including housing costs) divided by total gross monthly income; it must stay at or below 36 percent.

As a caution -- do not be tempted by easy money since many credit card and mortgage companies will lure you with very sweet offers that often have hidden charges behind them. Think 10 times, not just twice, before you take on debt or add more debt by first assessing its viability against your earning power as described above.

Refinance your house loan only if needed and that too at good terms; not for cash-out that most mortgage companies want you to do and splurge it away. It is a good idea to have one or two credit cards with lower rates, and to pay off the balance fully, every month.

We belong to that group who believe in what economist Adam Smith observed, but with a slight enhancement since he forgot one very important aspect of this whole issue as it applies to the current times versus his period of eighteenth century (1723 – 1790).

Adam Smith:  “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”

Dave&Nita:  “What can be added to the happiness of a man who is in health, out of debt, has a clear conscience, and an equally responsible spouse (or government in the case of country debt)?”