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!

You Still Have To Save

I wear corrective vision lenses. My vision started to decline when I was in college, so I got glasses. At first I only had to wear them when I was sitting in the back of a lecture hall or driving at night so it wasn’t that inconvenient. Over a very short period of time, my vision deteriorated to the point where I needed to wear the glasses all the time. I was finally convinced that I needed to move to contacts when I realized how problematic the glasses could be. I know lots of people wear glasses with no problems, but I wasn’t one of those people.

I tried out ROTC one semester in college. I decided not to enlist when I was offered a full-ride scholarship for the rest of college. I know, it doesn’t sound like it makes much financial sense, but I wouldn’t have been able to be in the reserves if I accepted that scholarship, I would have had to have gone active duty once I graduated, and I just didn’t want to do that. But for that semester, I had PT (physical training) every weekday morning at 5 AM. It was really cold most mornings, so we’d come in from running and my glasses would fog up. So I’d take them off while we were doing the floor exercises like sit-ups and push-ups. One morning I had to miss my classes for the rest of the day because my glasses got stepped on while they were lying next to me. That did it for me, well that and vanity. I ordered contacts that night when I got my glasses repaired.

I’ve never really been comfortable with contacts either though. I get dull headaches on a pretty regular basis. Of course it doesn’t help that I wear them from about 5 in the morning until almost 10 at night. So I decided that I wanted to look into corrective vision surgery. I am slightly nervous about it, after all there are risks associated with any surgery, and other than inconvenience, there aren’t any real risks with glasses or contacts. But my eye doctor was one of the first to start doing the surgeries in the area and so has tons of experience and a really good track record. The next obstacle was of course the money. It’s a fairly expensive procedure, but other than having to pay for it all at once, it’s actually cheaper long-term than purchasing contacts over my life-time.

After deciding that I wanted to pursue this option, I made an appointment to find out if I was a good candidate for the surgery and exactly how much it costs. I am fortunately a good candidate for the surgery, and after saving money for nearly two years I now have enough money to pay for the surgery.

I’ve had several people at work say to me, “Just use your flex account.” They are referring to the IRS-approved flexible spending account program that allows us to set aside tax-free money to spend on eligible medical expenses. This is a great option to save a little money, and I will be using it. However, because I live on a budget and my checks will be smaller after the money is withheld for the account, I still had to save for it.

I’ve written about saving up and delayed gratification before here. Even if you can find an alternate financing method, whether it’s a flexible spending account or a line of credit, it’s still a good idea to save first for anything that isn’t an emergency need. This coming fall I’ll be getting the surgery done and will know that it’s paid in full when it happens.

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.

How The Recession Can Help Us

Back when I first started this blog and before the recession had really taken hold, I posted a link to a very good article by Liz Pulliam Weston. She talked about the impact it would have if we all started to increase our savings and use our money more wisely. She predicted that the short-term impact would be a global economic recession since our economy was so dependent upon consumers. But she thought it would be good in the long-run because of the positive impacts to both individuals and the broader economy.

I remember at the time thinking that managing our money and living within our means was still the right thing to do, but that it might be hard to convince people to do this because of the pain of going through a recession. Well folks, the recession happened, whether or not we wanted it to. So if we have to go through this, it’s encouraging to me to hear that savings rates are going back up (although no where near the high of 14.6% we saw in 1975). More people are starting to live within their means now. So maybe we’ll get the long-term benefits the article listed even though this wasn’t an entirely voluntary decision.

Responsible Spending Habits Slow Economic Recovery

Sarah Lockyer recently penned an article in Nations Restaurant News about decreased spending by consumers due to fears of unemployment. The article is based on research by Technomic Inc. which indicates that an economic turnaround will take longer because consumer spending is slower. From the article:

"The current broad unemployment rate, which includes not only those who have lost their jobs, but also workers who are underemployed or discouraged, has reached 15.8 percent and is rising, according to a July Technomic report from the firm’s consulting economist, Arjun Chakravarti. The prolonged climb of unemployment in the United States has not only affected the spending habits of those without jobs, but also has changed the spending habits of those who remain employed “by spreading psychological uncertainty across all workers in the economy,” Chakravarti said".

Although it would be nice if the economy would recover quicker, it will come back stronger and more stable if everyone increases their savings rate. I know that economists would be happy with a quick turnaround, but I for one am pleased to hear that people are developing more responsible spending habits.

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.

Another Benefit of Delayed Gratification

Practicing delayed gratification is one of the most important tools to assist you with successful money management. By saving up in advance so that you have the money for the things you need before you purchase them, you keep yourself out of bad (unnecessary and providing no long-term gain) debt. The other thing that delayed gratification does for you is to allow you time to cool off. I’ve found that there are times that I’ve decided I really want something, but by the time I’ve saved up for it I realize that I’ve gotten along this far without it and don’t really need it.

So now not only did I avoid going into debt, but I’ve also managed to increase my savings rate. Two for the price of one, always good in money management!

More Discussions About Money With the Kids

My eight-year old daughter decided she wanted a new MP3 player that was more sophisticated than the Disney version she'd gotten a few years ago that basically just has a play button. At first she had her mind set on an Ipod touch. We told her she had almost enough money and would just need to save for a little while longer.

We talk to our kids about how much money they have in their savings accounts, so her response to save for a few more weeks was, "I don't need to, I'll just take the money out of my savings account." When I explained to her that she couldn't use her savings account that way, she was pretty disgruntled. It was her money and she wanted it.

It's a bit abstract to explain to a child who's still 10 years away from it, that she can't use her money now because she'll need it for college. But we did have the discussion and she eventually resigned herself to the fact that she'd have to wait until she had saved up a bit more allowance. Although after further digging, we realized that a much less expensive MP3 player would meet her needs and she was able to purchase the player right away. So although the savings account discussion turned out to be unneccesary, I'm still glad we had it. I'm sure it will be first of many times and I imagine it'll become harder to convince her to leave that money alone as she gets older!

Are We Learning a Lasting Lesson From the Economy?

I was reading a blog that I enjoy the other day called Bing's Blog. He has a post about things that we've learned during this economic downturn that we should, but probably won't remember when the economy turns around. Item #5 on his list worried me a bit.

It seems that everyone is more aware of their spending habits these days, which as the Money Maiden, I think is fabulous. But he predicts that we'll all forget that unchecked consumerism and no savings were problematic, and that we'll all start doing it again. I imagine that he's not far off the mark. I look at my grandparents who grew up during the Great Depression and their lifelong frugality. Don't get my wrong, my parents are very responsible with their money (they taught me after all), but they aren't as stingy as my grandparents were. So if I were a betting woman, (I'm not, that's not responsible money management!) I'd take the bet that once the economy recovers, some of the people who had become more responsible out of necessity will go back to their old ways. But I hope that not everyone does. I hope that we as society start focusing on saving money, and producing things for others to buy, instead of trying to build our wealth from a house of cards like we did in the past.

Spending Less Money

Barbara Warmsley, also known as the "Green Granny" is posting videos on youtube with ideas about how you can spend less money. I saw an interview with her where she discussed the fact that she grew up during WWII and learned how to be frugal. My grandparents who grew up during the Great Depression also learned to be less wasteful and to make better use of their items than my generation.

These videos have some good ideas that just might help you to stay within your budget. They might also trigger some of your own ideas about ways to save money.

Squirrel Away Money When You Have the Chance

In a recent issue of Time magazine, there was an interesting article about your job being your most important asset. It had some different ideas and definitely gave me some food for thought. It also underscores that education, what I call good debt, is worth pursuing because it increases your future earning potential.

But what about all of the people who have lost their jobs, or are in danger of losing them soon? Their “asset” is no longer paying out. The best protection if this has happened, or might happen to you, is to have money in savings. I know a few people who work at jobs where they are assigned to particular long-term projects. Some of these folks know that there aren’t any new projects in the queue and that their employment will be done when their current project is done. One person is not really worried because he’s saved money for just such an occasion and knows he’ll be all right for about 1 year. Some of the other people I know are sweating it a bit more.

I realize that there are all kinds of expenses that make it difficult to save. However, it is easier to find money to set aside when you have a job than when you’re on employment. Make a category for savings in your budget and put as much as can in there each month. Check with your work to see if you can have two accounts for your direct deposit. If you can (and most workplaces who have direct deposit can), just put some money directly into your savings account. It can be easier if you never actually have the money to spend on other things. Do what you need to do so you’ll be a little bit safer if you lose your job.

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.

In Case You Needed Another Reason To Get Healthy

In case you needed another reason to get healthy, how about your long-term financial goals? This is a very interesting article by Dan Kadlec that appeared in Time Magazine. It makes perfect sense and is one more source of motivation for making healthy decisions.