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Plan Now for an Erratic Year

By Deborah Nayrocker
Guest Writer

CBN.comPeople are noticing similarities between this economic crisis and the Great Depression. Economist Martin D. Weiss states that although the federal government is trying to slow down the crisis, don’t expect it to let up any time soon. Weiss says now there are four powerful factors that may make the government’s impact seem trivial. They are:

  1. Broader speculative bubbles. “This time, the speculation has engulfed not only stocks but also millions of homes, commercial properties, local governments, corporations, and entire nations.”
  2. More household debt. “U.S. households are in far greater debt today with much less savings. In the 1930s second mortgages, home equity loans, creative financing, and credit cards didn’t even exist.”
  3. The United States is now a debtor nation. “In the 1930s, the U.S. had large surpluses of foreign reserves and was a creditor to the rest of the world. Now it has minimal reserves and huge foreign debts.”
  4. Derivatives. “There are nearly $600 trillion in notional value derivatives globally, according to the Bank of International Settlements. The forced liquidation of many of these derivatives could frustrate government efforts to revive credit markets” (Money and Markets, 12/29/08).

Having money in reserve for the unexpected circumstances of life is crucial to handling this recession.

Yet a recent credit card company poll found that 76 million Americans have no savings.

Many people are living on more than they earn. They’ve convinced themselves it is OK to make up the difference on their credit cards. This has caused their debt to snowball.

About three years ago a financial advisor stated that 1 in 3 Americans got a home equity loan to pay credit cards. Yet many continued with the same spending habits. They were not willing to make lifestyle changes and stay within a budget. They have been part of the problem.

The U.S. personal savings rate turned to a negative rate a few years ago. According to The Wall Street Journal, “The biggest and most underrated development in the U.S. economy…is that the personal savings rate went negative” (WSJ, Jan. 4, 2006). The rate has fallen sharply since the mid-1980s. The last time the savings rate dipped below a positive rate was in 1933, during the Great Depression.

Why is savings slowing?

Consumers have amassed large amounts of debt, making it harder to save.

Studies attribute the blame for poor savings rates to growing housing and transportation costs. People have been spending more on homes and cars.

They have been buying “the most house” they can afford, rather than the house they need. The definition of affordability has been changing. Expenses of home ownership have been growing, including property taxes and insurance.

Another reason for the poor savings rate is that consumers have been borrowing against their homes to get access to spending money. In 2006 Americans took out $243 billion from their home equity. This was considerably more than in any other previous years.

Today the economic climate is different than a year ago. Consumers no longer have easy access to credit. Several industry sectors are struggling: auto, retail, housing, and financial services.

A recent study shows that more than one-fourth of retailers have a high possibility of bankruptcy (WSJ, Nov. 2008).  Joblessness may hit 7.5% in 2009, as reported in The Kiplinger Letter.

Martin D. Weissreports, however, that “unemployment is actually 13.5% – nearly double the narrowly defined unemployment rate – if you include job seekers who have given up looking or who have been forced to accept part-time work” (Money and Markets, 1/12/09).

The current economic downturn is not discriminating. People from all walks of life are being affected.

Families are looking for ways to survive financially. Businesses are struggling to meet their payroll and other obligations. The banking industry is hesitant to loan out money and lines of credit are shrinking, even frozen.

Pawnshops throughout the United States report “a surge in new activity fueled in part by a different clientele: middle- and upper-middle-class customers facing ravaged stock portfolios, tightened bank credit, and unexpected layoffs,” according to The Wall Street Journal.

With uncertainties ahead, having sufficient savings will ease the difficult times.

But having intentions to save isn’t enough. Turn good intentions into reality.

Take charge of your savings. When you’re in control of your money, you’re in control of your life. Set aside savings in an emergency savings account and in retirement accounts.

Grow your emergency savings account to establish financial control and direction. Build the account to at least 3-6 months of living expenses and hold it in a liquid account.

  • Begin by having 10 percent of your paycheck automatically deposited into your savings account. If you save $150 per month with an interest rate of more than 2 percent, in one year you’ll save $1,818. In three years you’ll accumulate $5,570.
  • Look for ways to reduce your family’s lifestyle consumption. Find areas for potential savings. Money that is freed up from fixed expenses can go toward the account. Eliminating the gym membership, vacationing closer to home, and choosing a less expensive television cable plan can save hundreds of dollars.
  • Avoid impulse spending. Shop for groceries with a list. Walk away from nonessential purchases and free up more cash.
  • Deposit tax refunds and bonuses into your emergency savings account.

Grow your retirement accounts.

  • If your employer offers a 401(k) plan, take advantage of this tax-deferred plan. Contribute at least up to the matching amount. The company-matching amount is usually 3% to 5% and is considered “free money” toward retirement savings.
  • Take a percentage of your income and open a Roth IRA account, contributing up to the maximum amount allowed per year. By contributing to your 401(k) and Roth IRA accounts, you are diversifying your tax strategy. We can expect tax rates to increase.

We all know how learned behaviors can be hard to overcome. We also know that financial freedom doesn’t just happen. It’s a choice.

When we take charge of our savings, we are on the right track and become part of the solution to a better future.


Deborah NayrockerDeborah Nayrocker writes on personal money management topics, showing others how to take control of their financial future. Deborah is the award-winning author of The Art of Debt-Free Living: Living Large on Less Than You Earn and Living a Balanced Financial Life, a popular Bible study focusing on money management. She writes the column “My Money” for More To Life (www.mtlmagazine.com) and has a Q&A finance column on www.Crosswalk.com.  Her Web site is www.ArtofDebt-FreeLiving.com.

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