Monday, March 14, 2011

A Penny Saved

While working, I often have cable news on in the background. MSNBC just finished a report indicating that rate of savings from personal disposable income has quadrupled since 2005. Given that many had been living well through substantial credit card debt, this is excellent news for those who have been able to shift from a credit-based model for managing household finances to a savings-based model.  Not so great for the credit card companies profit margin, but I think it is past time for finance companies to adjust their expectations.

My past experiences taught me the importance of maintaining a financial cushion. It is likely that I would not have lost my home to foreclosure back in 1987 if I had had a 3-6 months of living expenses in savings. Instead, I had lived up to and beyond my income. I did not have a significant debt load, but I had no buffer to accommodate the unanticipated reduction in income when I went onto state disability. The payment formula provided 45% of my previous net income and I was left with the choice of 1) paying for utilities, food and credit cards or 2) paying my mortgage. I chose the first while waiting for long-term disability to begin payments. By that time, my mortgage was already in foreclosure, and I was unable to resolve matters with the bank. Losing my home to foreclosure was the most devastating personal experience of my adult life. It provided me with a sense of rootedness in my life, and it took years to recover from the experience.

As I have reconstructed my life over the past 15 years, savings has been a priority. Among the strategies I use to save is to consider every purchase from the perspective of a want versus a need. I need to pay for my housing, my utilities, my food. I am obligated to pay for my vehicle and any credit debt I accrue during the month. I may want a new computer, television, shoes, clothing, a hair cut, but I do not need them in the sense that they are necessary to my survival. Thus, I consider expenditures for wanted items within the context of other priorities in my life before I choose to spend funds rather than save them.

I am fortunate; my income is sufficient to accommodate both necessary household expenses and additions to savings.  For those with more constrained financial circumstances, though, savings should be no less a priority.

Several strategies can be used to help build a buffer of savings. If possible, direct deposit any tax refunds into a savings account and leave it there against the future.   Look at your daily expenditures and consider those that are not necessary.  Even if you do no more than throw the day's small change into a change rack, roll it and bank it as rolled coin accrues, it can help you to build a buffer against an uncertain future. Roll that change at home.  Your bank will give you coin wrapper for free, and you can buy an inexpensive rack that holds one roll each of pennies, nickels, dimes and quarters.  Rack that change up, and roll it as it fills the slot.  Why give 10% of your savings to a Coinstar machine? Never take a tax loan to get the money sooner; bank with a credit union or a community bank not with a large commercial bank like BofA or Chase.  If you use TurboTax or another online tax preparation software, pay the state tax filing fee directly rather than paying the extra fee charged when you deduct it from your refund.

In Poor Richard's Almanac, Ben Franklin recommended to readers that "A penny saved is a penny earned." That sentiment is no less worthy of consideration today than it was more than two centuries ago.

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