Savings and Debt

How do you actually save for a special item or get out of debt? Of course you’re already putting regular money into savings. This is referring to that trip or expensive new item you need.

Step 1: Determine how much money you need.
If you’re working on getting out of debt, don’t forget to factor in interest payments.

Step 2: Determine how long you have to save, or how soon you’d like to be out of debt.

Step 3: Divide the total needed by the number of months to figure out how much money you need to set aside each month or pay to your creditors.

This also works for Christmas. Yes it just recently ended, but now is the best time to think about how much money you’ll need next December and start setting aside a monthly allowance.

Here's a link to a wonderful story about a family that paid down over $90,000 in debt in a very short time. You might find it inspirational!

Spending Money We Don't Have

I’ve been a bit reticent in my posting lately because sometimes life just gets in the way! However, I recently ran across a story on NPR that I just had to chime in about though. Consumer Spending Up, Incomes Lag talks about the increase in spending that resulted from programs such as Cash for Clunkers while income growth continued to be just about flat.

As a proponent of good debt only, this story scares me a bit. If we’re not making more money, we shouldn’t be spending more money. The statistic offered about the falling savings rate was also a bit disconcerting, but did have some good news when compared to savings rates last year.

“The big jump in spending and much weaker gain in incomes translated into a big drop in the savings rate. Personal savings in August fell to 3 percent of after-tax incomes, down from 4 percent in July. That was still nearly double the savings rate of a year ago. Economists say the savings rate will keep trending higher as households try to repair investment savings shredded by the recession.”

We all want the economy to recover, especially so people can get back to work. But a recovery based on additional debt won’t be a long-term permanent recovery, it would just put us back on the precarious house of cards that our economy was built on before the recession occurred. So the Money Maiden’s advice is to keep putting that money into savings so that we can all benefit from a stable economic recovery.

"Going American"

My family recently hosted a wonderful young man from France through a foreign exchange program. Although we don't speak any French so we occasionally had to try more than once to understand each other, we made it work; and the cultural exchange of information along with a new friendship were well worth the effort.

One day he and my husband were discussing debt and he told my husband that in France the only debt people take on is for big items like cars and houses. (Sounds awfully familiar.) He said that it would never cross his mind to take out a loan for something small like a TV. He actually said that if someone ever talks about taking out a loan for a small item they call it "Going American." I don't know that it's such a great thing to have our country associated with frivolous debt. I can only hope that over time if more and more people are smart about debt that phrase will lose it's meaning and go out of vogue.

Debt Load

There was an interesting article in this week's edition of Time Magazine about what our economic recovery will look like. One of the sections in particular caught my attention.


[Frugality] is an extremely fashionable topic at the moment. Some cultural observers even think Americans are due for a prolonged shift away from the consumption obsession of the post-World War II era. That strikes me as an iffy bet, but it is clear that the debt-fueled consumer spending binge of the past couple of decades is over. The household debt-to-income percentage more than doubled, from 65%in 1982 to 135% in 2007. That turned out to be way too much for us to handle, and now the leveraging process has gone into reverse. The latest household debt-load reading from the Federal Reserve is 128%, and while nobody knows exactly where the percentage will end up, a lot lower seems like a safe prediction. Which means that for years to come, American households will be spending less than they take in.

Huh, over 100% debt-to-income was too much to handle, does this seriously surprise anyone? I’m definitely not the first person to ever say “live within your means.” How do you prepare for retirement if you’re not only not saving, but spending more money than you’re making? I hope that the cultural observers are right in that we all move away from all that consumption and start trying to build on our wealth by saving some of the money that we earn, and that we’re all in it for the long-term.

European vs. American Financial Institutions

According to a broadcast on NPR, the European banks are blaming America's current financial crisis on too little regulation, too much debt, and not enough savings. Europe sounds like me!

Regulation: You have to have a good understanding of what is happening with your money to be able to manage it. If you've worked in business you've undoubtedly heard the old adage, "what gets measured, gets managed."

Debt: In order to get and/or remain debt free, we must spend no more money than we make, and preferably less than we make.

Savings: It's important to have money set aside each month for all known expenses, and equally as important to have a long-term savings plan to send your offspring off to college, and to someday be able to quit working.

It's a good bet that the government won't bail you out to the extent that they're bailing out the banks right now, since your collapse doesn't jeopardize the global economy. So maybe we as individuals should follow the example of the European banks rather than the American banks.

How to Eliminate Debt

Nearly all of the advice you read or hear about money management recommends not spending more money than you make. But what do you do if you've spent more than you should have in the past and you're carrying unwanted debt? You make repaying that debt part of your budget.

I once worked as a Before and After School Program director at an Elementary School. When I took over as Director of the program, it was $40,000 in debt on an annual budget of about $160,000. Getting the program back to it's self-sustaining status was a pretty daunting challenge, but one I was willing to take on.

I drafted a budget for the program which included that debt as a monthly expense so that it would be paid off by the end of the year. This plan meant having to cut spending in other areas. We accomplished this by doing a few things differently than we had in the past. We went through all of the craft cabinets and cataloged all of the leftover supplies from old crafts. We then planned our new crafts around those old supplies instead of always buying new supplies. I scheduled the staff differently so as our numbers went down in the late afternoon, staff went home, which worked well for the high school students working in the program. I also worked with families who were behind on their payments to help them to make plans to get caught up.

By the end of the school year the program was not only out of debt, but had a surplus of $4,000 that we were able to donate to the school to buy a marquee sign for the front of the building. My daughter goes to that school now, and every time I see that marquee sign I remember what good money management can accomplish.

So if you're carrying debt that you’d like to get rid of, make it a part of your budget. Decide how much you can pay each month and pay that amount. You'll need to include any interest that you owe as part of the budget or you might just feel like you're only staying even, and absolutely make sure that you’re paying more than the minimum amount required. This might mean making some cuts in other areas, but the result is well worth a few sacrifices. If you stick to your payment plan each month, you’ll be able to get rid of that debt and rest easier in the knowledge that your financial situation is much more secure.

Good Debt vs. Bad Debt

Is there such a thing as “good” debt? My grandparents didn’t think so. They grew up during the Great Depression and they never took out loans for anything their entire lives. They paid cash for every vehicle they ever bought. They built their house in stages, living in their basement for a time so they wouldn’t have to take out a mortgage. I have to respectfully disagree with my grandparents, I don’t know that any debt is really great, but I think some is both necessary and not all that bad.

The first kind of debt that I recommend is a mortgage. The vast majority of us have to pay someone for our housing, whether we pay rent or a mortgage. And if you pay a mortgage you’re building up equity (albeit at a slower rate than it was once possible to do.) You can also use part of your mortgage interest payments as a deduction on your taxes. So overall, I’d call a mortgage good debt.

Car loans are a little harder to justify, but I live in Denver which isn’t known for stellar mass transit options, and my husband and I both have to get to work. So we have auto loans for our cars that is maybe not “good” debt, but it is pretty much necessary debt.

My husband went back to school a few years ago to get his Master’s Degree and we took out a student loan to pay for his schooling. I also think this is good debt because it allowed my husband to get a raise (he’s a teacher and he automatically gets more money for higher education), and the required payments are so low that it’s easy to pay additional principle on the loan.

So I guess I’d call debt "good" if it’s necessary, has a reasonable interest rate, and/or helps you to improve your life in some way. Bad debt is pretty much everything else, especially those nasty credit cards that definitely do not have a reasonable interest rate!