As featured in The Wall Street Journal, Money Magazine, and more!

Saving


I was reading comments on older Consumerism Commentary articles and I came across an interesting statement. A reader, who had otherwise good advice to provide another reader who was pondering whether to use an unexpected $100,000 inheritance to pay off a mortgage or invest in the stock market, said the money or a portion of the inheritance should not be used for an emergency fund.

He did concede a “contingency” fund might be a better idea, but I’m not sure I understand the reader’s intended difference between an emergency fund and a contingency fund. Perhaps it’s only in the word choice. Specifically, he said the following:

Emergency fund? Law of attraction at work. If you have an “emergency” fund, I guarantee you will have a lot of emergencies in your life. Let’s have a “contingency” fund instead. Even after paying off the mortgage, she will have a good amount of money left over for BOTH contingency and investing.

Perhaps “emergency fund” isn’t the best name for money set aside, not invested, and available to handle unexpected situations.

Nevertheless, I disagree with this reader. Having an emergency fund doesn’t guarantee emergencies. I can see why one might think that, though.

A feeling of security encourages risky behavior. By having money available for emergencies, whether in a liquid savings account or stashed under the mattress, you have a psychological cushion. You know that you’re relatively secure financially and could handle, at least to a limit, financial emergencies. When you feel secure, you are more apt to take risks, whether with your life decisions or your money directly. With the an increased number of risky choices you make or with an increased level of risks for your actions, you could increase the chance of needing to dip into your emergency fund.

I’m no stranger to this concept. By building up savings, I felt comfortable enough to quit my relatively secure day job in favor of putting all of my time into a risky business based around nothing more a website and the advertising revenue it generated. Having money in the bank encouraged this risky behavior, and it could have gone horribly wrong.

Now, I like to think that my human capital is at such a level that had I needed to find a secure form of income, I would have been able to find a job quickly. But I know pretty intelligent and experienced people who had been unemployed for a long time; there’s no guarantee I would have been able to replace lost income quickly.

With an emergency fund, everything becomes an emergency. There should be self-imposed limits on what constitutes an emergency and necessitates a withdrawal from an emergency fund. Failure to plan for events within reasonable expectations does not really constitute an emergency. Realizing at the last minute you didn’t save to buy presents for your kids is not an emergency, even if their crying makes you believe that giving into their demands is the only way to soothe them. Having a rough day at the office and deciding to take a last-minute vacation consisting of a weekend getaway is not an emergency, either.

You can certainly use your accumulated savings to pay for these two types of expenses, but if you have money set aside in a fund designated for emergencies, you’d be better off keeping that cash where it is and looking for a different savings source. Money is fungible, and there’s nothing concrete that separates one type of savings from another assuming the funds are all kept in a similar type of savings account, but emergency savings should be prioritized differently and set aside, untouchable only in certain situations. It may be the case that you’ve only been able to save a little bit of money at this point in your life. Without a fully-funded emergency fund and with no other savings, you have to be careful about your decisions that affect your money.

There’s a chance that an emergency fund turns into a regular savings account, accessible for the smaller so-called emergencies that appear on a regular basis. If they aren’t true emergencies, find another way to pay, the best choices being either other savings or excess cash flow.

The reader seems to give the impression that because of the “law of attraction,” having an emergency fund will invite real emergencies. According to this so-called “law,” focusing on negative thoughts brings about negative circumstances. Of course this isn’t a “law” at all. In fact, it has no basis in reality. Yet it is an observable phenomenon on an individual basis if someone is actively looking to see the “law” at play. I could attribute bad things that happen to me to my negative thoughts as easily as I can attribute good things that happen to me to my positive thoughts because, like most human beings, I have both negative and positive thoughts at varying times. Thus, the “law” is rendered meaningless.

If, however, you primarily have a negative attitude, you’re more likely to interpret events as negative. That’s normal, and it doesn’t need a fancy name. The good news is by having an emergency fund, you are thinking positively about your financial situation. Emergency funds do not cause people to fixate on the negative possibilities. Being able to afford to handle financial uncertainly or what would otherwise be devastation is one of the most positive aspects of a financial life.

If you believe in the “law of attraction,” the positive change in your life brought about by a fully-funded emergency plan, or by thinking about such things like being financially protected, could lead to most positive financial decisions, like paying off your debt and increasing your net worth.

To address the reader’s word choice of “contingency” rather than “emergency,” wouldn’t this interpretation of the “law of attraction” specify that one with a contingency fund has more contingencies?

Do you believe that the state of having an emergency fund invites the incidence of more emergencies?

{ 10 comments }

This week has been dubbed American Saves Week by the Consumer Federation of America, a non-profit organization founded in 1968 “to advance the consumer interest through research, advocacy, and education,” according to the organization’s website. All this week, the group and many partners in the non-profit world, in the financial industry, and among publishers will be promoting concepts related to responsible care of personal finances.

Although I had always been aware of the importance of saving money — whether for emergencies, for the distant future, or for upcoming purchases — my problem as a kid and a young adult was that I thought I wasn’t earning enough money to save. And if you looked at my cash flow statement at the time, you wouldn’t have been able to argue with that.

My first permanent job out of college was with a non-profit organization 66 miles from my home, up the New Jersey Turnpike. It required travel over the weekends, and there wasn’t much reimbursement for those expenses. Considering rent and other basic expenses, my low salary was barely enough to cover my ability to maintain the job. If I were to take into account the number of hours I worked, I would be too scared to determine my effective hourly rate.

All things aside, it could have been a very satisfying job, under other circumstances. But it wasn’t, and I suffered mentally and financially. Nevertheless, I started contributing just a little bit into savings. Although I thought I wasn’t earning enough money to save, I found occasional opportunities to choose to deposit rather than spend. I made some sacrifices. I moved closer to the job. I did what I could to start moving in the right direction, even if slowly.

I was part of the 64 percent of Americans who, according to the National Foundation for Credit Counseling, wouldn’t be able to come up with $1,000 to pay for an unexpected expense without neglecting responsibilities or going into debt.

The best changes came after I left that job. I found myself a less stimulating but more financially responsible position, learned more about personal finance, and found out what it was like to be able to save money regularly rather than haphazardly.

When you have a positive cash flow every month and you are out of debt, every dollar you earn goes to you — not to the credit card companies, not to the banks’ profit lines. Sure, you still have expenses, but when you have money left over after your basic needs are covered, you have the choice of saving or spending without going into debt. And having that choice is freedom; everything else is a form of financial slavery (or indenture).

Savers don’t always have it easy. The government is charged with the task of stimulating the economy, and the widely accepted theory is that the economy grows more when people spend compared to when they save. At the same time, in difficult economic environments when people are concerned about the security of their jobs and paychecks, people are inclined to save money for financial protection.

Consumers who put money into savings accounts while the economy was running smoothly were rewarded with interest rates as high as 5 percent, with bonus rates even higher. This was almost double the rate of inflation. In other words, you could hold your money in a bank account for a year, and it would be “worth” more in terms of purchasing power than it was worth when you deposited the funds. Banks were willing to pay high rates because they were able to use savers’ money to lend to other customers, many of whom were making so much money in the real estate market, flipping houses for example, that the banks were able to sell expensive loans.

In today’s environment, the banks aren’t writing as many loans, and the financial industry is flowing with low-cost money from the Federal Reserve. There’s no need to pay customers high interest rates on savings accounts because the banks have everything they need at government-inspired low rates.

In this economic situation, there are some financial experts who are saying this is a good time for borrowers, not savers. Borrowers are being rewarded with low rates, particularly in the real estate market. This is supposed to inspire the real estate market, and then eventually the stock market and the economy as a whole, but two things are still keeping this recovery slow: the unemployment rate is still higher than it’s been during better economic times and banks are more stingy with loan qualifications than they were during happier periods. As a result, people don’t feel great about their jobs and potential for future income. So while we may be out of the Great Recession, we don’t feel fully recovered.

Without the financial reward of savings interest rates above inflation, why still save? Why not take advantage of low interest rates and buy assets that have a good chance of appreciating in value? I have some thoughts about my motivation, which I’ll share here. What motivates you to continue saving without the financial reward?

Here’s why I save:

  • It’s not all about the interest. My savings accounts may be part of my overall financial strategy, but it’s not an investment in which I expect to earn money. I don’t need to earn interest to save, though the higher the interest, the better. The purpose of saving money is partly for emergencies. Knowing I can get to my savings quickly and that it won’t lose value (except for inflation) keeps at least some of my money in a bank account.
  • Saving provides financial freedom. If you want to buy a $1,000 television but you have to put it on your credit card, you may end up paying $1,500 or more for it. By the time you’ve made your last payment, the television might only be worth $500 or less! That’s not as good of an example as something that happened to me recently. My mother was in the hospital on the other side of the country; because I had savings set aside, I could buy a flight at the last minute. Normally I’d only buy airplane tickets in advance to avoid high prices, but that’s not always possible. The flexibility to do what I need to do, when I need to do it, without needing to ask whether it would create a financial hardship, is the kind of freedom provided by saving.
  • Saving makes me feel good. I have a fully-funded emergency plan. It involves more than just cash or savings accounts. It has tiered access, and is more helpful and more rewarding than just an emergency fund. Being protected from emergencies in this matter makes me feel secure in knowing that I’m unlikely to face an unexpected expense that I can’t handle.
  • I can take more risk in other areas of my life. With a strong back-up plan and healthy human capital, I can afford to take some risks with my life. I quit my regular job to work for myself a few years ago, but only after I was secure with my finances. I could move out of my apartment, absorbing the expenses, if it makes sense for me to move. I’m able to diversify my assets across a broad range of investments, with a meaningful investment in many thanks to my savings.

Perhaps the day will return when savers are rewarded with higher interest rates, but I’m not counting on that happening any time soon. If not for earning interest, why do you save money?

Photo: Flickr

{ 10 comments }

This is a guest article by Jason Larkins. Jason is the Director of Financial Education at Wise Wealth, LLC in Lee’s Summit, Missouri and the author of the website WorkSaveLive.

For years I had my personal struggles with money: spending more than I made, following the status quo, and living life like I’d die tomorrow. Debt piled more quickly than I could have imagined and after years of digging a hole I eventually found myself buried under $110,000 of debt.

Those struggles — calls from collectors, thoughts of bankruptcy, sleepless nights — eventually would be overcome and my life’s transformation would result in me changing my career, taking a pay cut of $70,000 and pursuing a job which involved becoming a Dave Ramsey-trained counselor and a financial adviser.

What I’ve learned from my own struggles, and from coaching hundreds of people over the last three years, is that my problems (as with most peoples’) stemmed from a lack of knowledge, a lack of common sense about how money should be handled and viewed.

Common sense and money

Whether you were raised by financially savvy parents, or had to learn by way of life’s teachable, often unforgivable moments, the fact that you’re readers of a highly popular finance blog would suggest that you have some common sense when it comes to handling money.

Some of this knowledge may include understanding:

Despite once believing that most people (the status quo) understood these principles, I learned the hard way that one should never make assumptions.

After becoming a financial adviser I began to do research on the average American’s struggle with finances. I wondered why so many people struggled saving for retirement, living within their means, saving for rainy days, and managing their debt levels.

Through a series of events, I found myself researching the savings rate (specifically the percentage of disposable income) and overall consumer debt over the last 40 years. The trends were quite shocking:

The blue line shows the total consumer debt (credit cards, personal loans, and mortgages, excluding student loan debt) in trillions of dollars. The red line shows the average percentage of disposable income that a person saves in a given year.

The major increase in debt from the early 1990s to 2008 is due to the ballooning of the housing bubble. It’s no wonder that so many experts predicted that it would eventually burst. While it looks like people started to pay off debt post 2008 (when the graph starts to go down), it’s most likely that the decline in debt levels was from foreclosures and bankruptcies.

While the consumer debt illustration is terrifying, the savings rate doesn’t make me feel any better. From 1983 on, there was a steady decline year-after-year in the amount that Americans were stashing away. While there was a spike in savings after the 2008 recession, primarily from the fear that swept the nation during that time, the statistics show that we’re trending back down and falling into our poor behavior.

What’s the explanation?

If common sense suggests we’re not supposed to go into debt and we’re supposed to save, why has the exact opposite been the status quo for the last 25 years?

Some will suggest it’s solely because of the increase in housing prices; others believe it’s because wages haven’t outpaced inflation over that time period.

While these realities have added to the cause, I believe a lot has to do with our lifestyle changes over the years:

  • Introduction of technology: cell phones and bills, cable TV, computers, internet, etc.
  • Traveling and vacations: sure, these have been around for ages but it’s almost taboo not to go on a yearly vacation these days.
  • Our desire for the “bigger, better, nicer, newer” as I call it: houses, cars, TVs, clothes, colleges, you name it.

Maybe it’s simpler than that

While my experience tells me that the materialistic shift in our culture over the last 30 years has a lot to do with our recent struggles, there is a fact that I can’t ignore: interest rates.

Some people believe that when rates are low you should take advantage of leveraging money. Borrowing money is cheap now, right? Why not go buy a $300,000 house (a little more than you can afford) when the rates are only 2.85% on a 15-year fixed mortgage? What about that nice car you’ve been looking at? If you sport a good credit score it’s pretty easy for you to get under 2% financing.

Furthermore, a decline in interest rates appears to discourage savings. The trend lines between the savings and interest rates are remarkably similar! Why save money when you can only get 1% in a good CD or money market account? The stock market isn’t yielding anything, so why bother with it?

Declining interest rates, declining common sense

Now more than ever it seems that families across the country are struggling with money. While it could be for a number of reasons, the charts above suggest that as interest rates decline, we forget the basic financial principles that were common back in the mid 1900s.

Gone are the days of living on less than you make, avoiding debt, and saving for retirement and rainy days. It appears that we may only regain our financial wisdom when interest rates start to go back up.

Have you noticed a shift in your financial mindset as interest rates have declined over the years? Have you saved less and leveraged money more than you would have otherwise?

{ 18 comments }

Preservation of capital is an important aspect of any financial plan, but in today’s economy, this is impossible without taking on some risk. At one time, you could confidently place any money you might need within one year in a high-yield savings account and be relatively confident that your money could buy at least as much a year in the future than it could buy the day you deposited your funds. Interest rates were relatively coordinated with the rate of inflation.

That’s not the case today. The Department of Labor released the latest inflation data. It should be no surprise to most consumers that the changes in the price of gas led to an increase in the energy index of 3.2 percent over the last twelve months (ending February). The inflation rate for all items is 2.9 percent. While the government-reported inflation rate doesn’t translate to the actual increase in expenses any one individual experiences year over year, it’s the best benchmark we currently have for a generalized view of the increase in prices.

And it’s the measure we use to determine how much purchasing power savers lose. If your savings account isn’t earning at least 2.9 percent after tax, you’re losing money in real terms by placing it in a bank. With banks offering less than 1 percent interest before taxes on their best high-yield savings accounts, purchasing power losses accelerate. Placing your cash under a mattress to earn zero interest is a worse idea, so are there any other options providing a safe way to maintain purchasing power?

Money BagsNot really. Using a savings account is great for funds you might need in an emergency, because you can access the money quickly without worrying about selling an asset. Savers have to understand that having an emergency fund is a compromise; in return for the safety of an FDIC-insured account, savers waive the right to preserve real value, at least in today’s economy.

Any other options for preserving capital introduce risk.

  • Investing in the stock market. Despite some recent frenzy about the stock market, with prices of the major indexes reaching near-term highs and day-over-day increases exceeding the best-performing day of the year thus far, there have also been daily price decreases reflecting the worst performance of the year. The stock market is incredibly volatile. For the long-term, it’s a good place to be, but there’s no guarantee that your capital will be preserved for when you need it.
  • Buying real estate. For years, families saw the house they live in as a way to store their wealth. The belief was unfortunately based on the myth that real estate values never decrease. Well, any asset can find itself in a bubble, whether they be tulips, stocks, or houses, and people who relied on real estate’s ever-increasing value to make a living have had a difficult time in recent years. It’s been terrible news for real estate flippers, but the effects hit single-house homeowners just as hard.

    Although timing the market is always dangerous, with low prices and low interest rates, if you can qualify and if the time is right for your family, now could be the right time to buy a house, particularly if you’re looking to live there for a long time.

  • Buying Treasury Inflation-Protected Securities (TIPS). You can buy this investment product directly from the U.S. Treasury. Twice a year, you receive interest as well as an adjustment to your principal balance based on the inflation rate. This is basically a bond that will only lose value in the event of deflation. If you must sell TIPS after the value has dipped below your initial investment, you will still receive your full initial investment back.

    There’s no risk in losing money, and this is the closest you might be able to get to true preservation of capital during inflation. Keep in mind, however, that the government’s reported inflation value doesn’t necessarily reflect any one household’s experienced rate of inflation. The government’s rate used for calculating TIPS adjustments, the CPI-U, uses the prices of a combination of goods that weights items in a way that might not be relevant to most consumers.

  • Buying gold. Investing in gold is traditionally a good way to hedge against inflation, but the price of gold fluctuates. Like all commodities, the value of gold at any particular time is subject to the whims of commodities traders. An investment in gold is not as stable as its reputation. The price fluctuation may be due to fluctuations in the value of the dollar or of any other fiat currency, but the cause is irrelevant because the U.S. dollar is the world’s standard for currency, and if that ever changes, it would be another currency or combination of currencies that becomes the standard, not a commodity like gold. The days of the gold standard are over.

    Furthermore, most people who invest in gold use ETFs or mutual funds due to convenience. It would be inefficient and expensive to store and secure a significant amount of physical gold bars. Once you are dealing with electronic trades rather than a physical manifestation of metal, you’re subjecting yourself even more to the whim of the financial industry.

With low interest rates and increasing inflation, this may be a good time, from a financial perspective, to borrow money. You can do more with someone else’s money, repaying the loan with money valued less in the future. Borrowing money is of course not a good idea for people who could find themselves in trouble with debt, as interest costs could spiral out of control, but if you look at the numbers, borrowers are getting a much better deal, relatively speaking, than savers.

In today’s economy, if you are preserving your money, how are you doing so?

Photo: Lord Jim

{ 25 comments }

Saving $300,000 By Age Eighteen

by Luke Landes
Eighteen

CNN Money is featuring stories from six young Americans, all of whom have managed to save substantial amounts of money as kids. When I was a teenager, saving money was never a priority for me. I understood the concepts, but I was more concerned with other things in my life: my hobbies, activities, school, and ... Continue reading this article…

40 comments Read the full article →

The Unemployment Cycle

by Luke Landes

The dangerous thing about advocating more saving and less spending, a responsible approach to personal finances, is that when the public applies this approach, the economy doesn’t move forward. The Commerce Department released consumer data from June today showing that personal spending dropped 0.2 percent during that month, the biggest decline since September 2009. It took ... Continue reading this article…

20 comments Read the full article →

Upromise Review

by Luke Landes

Upromise takes the concept of earning cash back on everyday purchases and aligns this benefit with saving for college or paying off student loan debt. You buy groceries anyway; Upromise helps you earn cash back on what you buy and use that money for your education expenses, the education of a relative, or for any ... Continue reading this article…

18 comments Read the full article →

ING Direct Kids Savings Account

by Luke Landes

ING Direct unveiled a new savings product designed to help encourage kids to learn the benefits of better financial habits early on. The Kids Savings Account isn’t much different from ING Direct’s standard Orange Savings Account for adults. Even today, Orange Savings Accounts be jointly owned by a minor if the joint owner is over ... Continue reading this article…

16 comments Read the full article →

Yahoo Finance Looking for Savers: Be On TV!

by Luke Landes

Yahoo Finance is producing an ongoing series of videos for their Financially Fit column. Each video focuses on an individual’s story. For example, they follow a New York City resident who saved $14,000 throughout the past year by downsizing his apartment and by choosing staycations rather than traveling. Personally, I don’t really consider “not spending” ... Continue reading this article…

8 comments Read the full article →

Silent Inflation Is Destroying Your Net Worth

by Luke Landes

According to the government’s figures, inflation was a modest 2.7 percent over the twelve months ending in March. The Consumer Price Index (CPI) is the Bureau of Labor Statistics’ popular measure of economic changes affecting typical consumers in the United States. It’s a figure we often compare to after-tax savings interest rates, reminding us that our ... Continue reading this article…

16 comments Read the full article →

The Saver’s Dilemma

by Luke Landes

At Consumerism Commentary, I’ve been writing about putting money into high-yield savings accounts for as long as this website has been around. Just as people started getting the message, banks pulled the rug out from under their customers. The Federal Reserve made cash easy and cheap from banks to access, and since the low federal ... Continue reading this article…

27 comments Read the full article →

Low Savings Interest Rates: Good or Bad?

by Luke Landes

No one’s happy with savings account interest rates these days. Even so-called high-yield savings accounts are closer to zero than they have been in a long time. For me, they heyday of savings accounts was when they were earning 5 percent to 6 percent APY several years ago. Some people remember when savings accounts earned interest rates ... Continue reading this article…

25 comments Read the full article →

Sell Your Unwanted Gift Cards at Plastic Jungle

by Luke Landes

Whether you’re giving or receiving gift cards, it’s usually a pretty positive experience. Both the giver and receiver are often satisfied because most gift cards allow the receiver to spend money in the way they want, as long as the giver has taken the receiver’s interests into account. Sometimes a gift card can miss the ... Continue reading this article…

20 comments Read the full article →

Recent Changes in My Personal Finance Plan

by Luke Landes

It’s easy to fall into financial habits. Even people who consider themselves inflexible can grow accustomed to a financial change after time. That’s the beauty of automation — an automatic 10 percent transfer to a high-yield savings account every time you receive a paycheck eventually becomes painless. Habits aren’t always perfect; just as you adjust ... Continue reading this article…

15 comments Read the full article →

Curb Your Consumerism

by Kelly Whalen

This article is presented by Kelly Whalen, Consumerism Commentary staff writer. The temptation to spend money is everywhere, especially during the holidays. There is something magical about lights glowing, soft Christmas music playing everywhere, and the hustle and bustle of the holiday season that seems to make money fly right out of everyone’s wallet. Whether ... Continue reading this article…

7 comments Read the full article →

ING Direct Offers “Added Value” Certificate of Deposit

by Luke Landes

In an effort to attract more new deposits, ING Direct is offering a new savings product with a high interest rate, the “Added Value” certificate of deposit (CD). If you are willing to deposit new money to ING Direct and let the bank hold that money for one year without any withdrawals, ING Direct will ... Continue reading this article…

2 comments Read the full article →

Ten Things to Do With $1,000 Right Now

by Luke Landes

Mention to your friend that you suddenly received an unexpected $1,000 and I would be willing to bet he could come up with several suggestions for you. Most of those suggestions will likely involve handing the money over to him. My first suggestion is to refrain from telling your friend when you have $1,000 more ... Continue reading this article…

17 comments Read the full article →

Is It Possible to Save Too Much Money?

by Luke Landes

For most humans, life is much shorter than we would like, and for many of us saving even ten percent of our income will never result in a state of wealth within our lifetime. There are too many forces working against this endeavor: a lack of sufficient opportunity, inflation, and unplanned events to name a ... Continue reading this article…

31 comments Read the full article →

What Percentage of Income Should Be Saved to Be Financially Responsible?

by Luke Landes

I’m pointing out a recent article featuring advice from Walter Updegrave, a senior editor of Money Magazine. Recently, he was asked to quantify the percentage of income that any individual should save in order for this particular action to be considered “financially responsible.” Normally, the advice I’ve seen suggests a rate somewhere between 10 percent and ... Continue reading this article…

29 comments Read the full article →

Eight Tips for Living Through a Recession

by Luke Landes

If you have been affected by the recession, perhaps by losing a source of income, you may not want to hear suggestions for turning a bad situation into an opportunity. In fact, the idea of turning challenges around for your own benefit is in line with the annoying soundbites that productivity gurus sell. But I ... Continue reading this article…

15 comments Read the full article →
Page 1 of 1012345···Last »