Letter Never Sent

In June, the American personal savings rate dropped to 0%!! This is absurd in the extreme.

I know few people of my generation who save. Our Baby Boomer parents grew up in a very different world. The world before instant credit and credit cards. A world without computerized databases where our collective histories and behaviors could be recorded and analyzed. Now we have social security numbers, drivers license numbers, and persistent electronic records. Our parents grew up when the financial world was less ominiscient. Everyone was largely innocent and naive when it came to credit. Credit cards themselves have only existed since 1951. In the old days, you had to be careful who you extended credit to. Nowadays, no one is really a credit risk. You can track a debtor anywhere in the country if they’re drawing a paycheck, and backruptcy laws have been introduced to make it more difficult to escape your debts.

Spendthrift nation:

That said, “a large proportion” of Americans are not saving and have never saved, Salisbury acknowledges. “That’s largely a function of income…. They’re just barely managing to survive as it is, and they don’t have enough income to save.”

A recent Consumer Federation survey found the lack of savings was especially troublesome to women. More than 70 percent said they worried about their finances in the last year, and two-thirds said that unexpected expenses – things like the furnace breaking or the car needing to be fixed – were the cause of that worry.

That’s because they had little or no money set aside. More than 40 percent of all women had less than $500 in the bank. For those 25 to 34 years old, the percentage without a rainy day fund jumped to 55 percent.

Many of us never learned anything about balancing our own books and socking money away, but we’d better since we can’t expect anyone else to do it for us. Why should they when it pumps billions of dollars into the financial sector of our economy? There are a few things you need to learn if you ever hope to be on top of your financial situation. Luckily, financial matters are very simple.

Principle 1: Spend less than you earn. Save the rest.

This is difficult for some people, but it is absolutely necessary if you ever hope to get in the black. Things will always cost more than you think and you can never predict every expense that might arise, so save for a rainy day when you receive those periodic windfalls. If you’re perpetually treading water you have two options: cut spending or make more money. You can do both for optimum effect. I know it seems like you have no room for spending cuts, but believe me you do.

Things that should be cut if you cannot save money each month:

1. Starbucks. You do not need a 4-5$ coffee. That coffee could easily turn into $10 if you invested it for a year or two.
2. Cable television, TIVO, Satellite TV, Netflix, etc. I have a love hate relationship with television, although now it’s mostly hate. Cable television on the other hand is a complete luxury. I can think of no real justification for it. It’s expensive and will turn you into the most unproductive person possible. If you routinely come home and plop down to watch television for 2-3 hours, do yourself a favor and have it disconnected. Instead, do something productive and life-affirming like clean the house, call your grandparents, paint, or work on something. Do anything but sit on your butt and watch television.
3. Any other subscriptions. Magazines, XM Radio, Yahoo Music, gym memberships, video games, whatever. Cut it. Have you really been using that gym membership? Don’t lie to me.
4. Dining out. Tighten that belt. For dinner tonight, crack open a can of soup and make a grilled-cheese sandwich. You just saved $10. Pat yourself on the back.

If you do all these things you will be amazed at the result. I promise you’ll have at least three hundred dollars more than you normally would at the end of each month and that’s equivalent to a raise of $2 an hour or $4000 a year. After a few weeks, you’ll also probably look better and fit into those pants that have been miraculously shrinking.

Principle 2: Know where your money is going.

How much are you spending on late fees, overdraft charges, interest payments each month? How much is your auto insurance costing you each month? How much do you spend on gasoline, or food each month? You should have some idea, and that will allow you to adjust accordingly. I highly recommend using something like Microsoft Money or Quicken. You can get either of these used off eBay or Amazon for about $20. My normal routine is to get up each morning and open Microsoft Money, which then automatically downloads all my bank transactions from my bank and sorts them according to category and payee. I also use it to track and manage any credit accounts, loans, investments, and accounts receivable. With reporting and automated bill reminders, it has become my financial command center. Knowledge is power. Don’t be afraid to peek under the hood of your financial life. It’s probably not as bad as you think.

Principle 3: It’s just paper and numbers.

If there’s one thing I want to emphasize it’s that money is just money. It is no measure of your value as a person. If you haven’t saved much of anything up until now, it doesn’t mean you’re a bad person, or that you’re stupid or lazy. Do not get emotional about it. Your fear will paralyze you. Money is just a tool, a means of exchange for goods and services. Keeping more of the money you earn will make you feel more secure only if you stop worrying about it. Change what you can and don’t obsess over everything else. If you’re in debt, find out how much and do something about it. The first thing you can do is cut up the credit cards and stop using them. This will cost you exactly nothing. When you throw away this crutch you unlock the creative potential of your brain. Without credit cards, you’ll have to start thinking of ways to not run out of money because you’ll have no other option. You will become more active and creative. What can I cut? What can I sell? What can I do to make more money? Is my job doing enough for me? What other options do I have? Credit turns off your brain and forces you to forestall important considerations. You can walk without credit, but your thinking will need to change. Instead of “I can’t afford that” you’ll have to start thinking “How can I afford that?”.

This entry was posted on Tuesday, August 2nd, 2005 at 5:54 pm and is filed under General. You can follow any comments to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.