Wednesday, February 4, 2009

I Want Off the Roller Coaster

What can I say, I love statistics. I tend to follow certain statistics like some folks follow their favorite baseball player. I know, I’m a nerd. One of the most intriguing stats out there that I follow is the American savings rate.

Back in January of last year it was negative (approximately -0.4% depending on the research data). Imagine that – a negative savings rate! When I teach our Past Due Boot Camps, I always ask a member of the audience to help me with some math: “What’s $40,000 per year minus $42,000 per year?” Of course, the response is typically collective laughter as the audience recognizes the point I'm making.

But why is it that we all laugh at something as preposterous as spending $2,000 more than we make in a year? The average person is doing it. Well, the average person was until the impact of the “economic downturn” really started to take effect back in the summer. One year after Americans had a negative savings rate, the Commerce Department reported that the savings rate was 3.6% of after-tax income.

We can infer from this data that when times are good in the economy, we tend to throw caution to the wind and “let it ride”. When there’s as much money floating around like there was just a couple years ago, we figure that we’ll just reach out and grab some if a negative event occurs. We can always out-earn our bad financial decisions, right?

When times are tough, though, we go into lock down mode. Batten down the hatches and hold on to your hats because we don’t know where this wild ride ends! I think that’s a pretty stressful way to live. Talk about a roller coaster. This isn’t just about the amount in your bank account, it’s about the burden and pressure on each of our shoulders when difficult times motivate us to save some cash.

The trick with savings is making it a habit and a priority all the time. Recognize that saving money is essential to cover emergencies, to get great deals on big purchases, and for long-term wealth building. There just isn’t any other way about it.

Since the average person reading this has been able to save more money in the past few months, I encourage you to continue building on that discipline even as our economy recovers. Making it a habit will diffuse financial “management by crisis” and restore peace and hope to your home.

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