Spending vs. Saving

A reporter called me the other day to ask why most Americans can’t seem to save for their future. That conversation subsequently got me thinking more about why most people can’t – or won’t – save. We’ve long had the developed world’s lowest rate of savings, and recent federal government statistics indicate that the national savings rate has actually gone negative, meaning that the average consumer spends more on goods and services than he or she takes home in after-tax income. We are indeed a nation of debtors.

That disturbing phenomenon may potentially have a very troubling impact on both the nation’s economy and – on a more personal level – the quality of retirement for millions of folks.

It occurred to me that most people are caught in a vicious cycle of relying on credit to buy things and trying to pay off those bills while continuing to use credit to buy even more things. It looks something like this:

  • January to March: Pay off the bills from holiday shopping.
  • March to April: Pay off winter vacation bills.
  • April to May: Pay the unexpected tax bills.
  • June: Opening-the-pool and landscaping expenses after the long winter.
  • July to August: Summer vacation with the kids.
  • September: Pay off the debt accumulated over the summer.
  • October to November: Pay off the back-to-school expenses from September.
  • November to December: Accumulate holiday shopping debt that you’ll pay off in the first three months of the New Year.

Wishing and Hoping and Taxes

Then there are those secular other expenses you wish you had saved for; i.e., grandma’s 90th birthday party, major home repairs or your daughter’s wedding. You had every intention of saving for this major expense, but somehow the time flew and you didn’t squirrel away a single dime over the last 25 years. What were you thinking? I know what you were thinking: not much. You were hoping. Hoping for what? To win the lottery!

So the all-too-familiar vicious cycle starts over again and never ends unless you actively take steps to stop it.

On top of all this, you pay 25% to 30% of your hard-earned income in federal income and FICA (Social Security and Medicaid) taxes and a further 4%-8% in state and local levies. In other words, more than a third of the workday is devoted to satisfying your tax obligations. Another way to think about it is to assume that you only get to keep about two-thirds of what you earn

As many of you know, my definition of insanity is continuing the same bad behavior over and over again and expecting a different and better outcome. So how does one stop the insanity?

Four Steps to Success

1. Begin tracking your expenses on a daily basis.
2. Prepare a realistic budget for the next 12 months that include:
a. Savings in your budget as an expense against your income.
b. Your taxes as a budget expense.
3. Accelerate you progress by automation. Don’t trust yourself to save. Set it up to be done automatically for several different accounts:
a. Retirement.
b. Children’s education.
c. Emergency fund.
d. Vacation fund.
4. Get a 15-year mortgage instead of the conventional 30-year Mortgage. You’ll be amazed at how quickly you can build up principal in your home and pay down the debt. This is a very nice way of forcing yourself to save. Accelerating your mortgage schedule is a very effective and painless way to save without realizing you’re actually saving.

Following these steps will help switch off the counterproductive behavior that got you into this vicious cycle and once again put you in control of your financial destiny. In fact, recognizing and admitting to yourself that you have lapsed into a dangerous state of financial indiscipline is the first step to recovery and, ultimately, success.

Helpful tool: Go to www.rwroge.com and click on the “Planning Tools” tab. Then click on the “Income and Expenditure Worksheet” tab to download this worksheet. It will help you create a budget that will provide a clear picture of outflows and inflows, the crucial first step to breaking that vicious cycle.

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