The Checkout

Are You Saving Enough?

This past weekend, my husband and I worked on our taxes. (This is early for us, but when you have a baby due next week, you have a powerful antidote to the procrastinating tendencies that normally kick in.)

Eyeballing our form, my better half guessed we'll probably have to pay this year, after a couple years of receiving refunds.

This wasn't a surprise. We went to a financial planner who assured us it was better to change our withholding so that we could have money now, as opposed to letting Uncle Sam hold onto it until tax refund time.

But I gotta say, while her advice I'm sure was fiscally sound, I am not looking forward to being the one shelling out versus being on the receiving end.

And no, it's not because I have a grudge against the government or because I want to demonstrate my solidarity with Marion Barry. It's because I'm not naturally a good saver and while the government may get the benefit of earning interest off my hard-earned dollars for a few months out of the year, I'm more likely to see that money if it sits in the Treasury than if it lands in my wallet. A fair trade, I always thought.

Anyway, it turns out, I'm not alone.

The Consumer Federation of America and a coalition of other consumer groups and government agencies kicked off the first America Saves Week yesterday.

It's not as if we haven't all been told a million times Americans are lousy savers. But CFA decided to tell us again with a not-so-surprising survey.

As you probably already guessed, those who have less money to save, save less.

According to a poll of more than 1,000 adults, the young, the poor, and minorities were least likely to have a separate emergency savings fund.

Those who had savings broke down like so:
*19 percent of those aged 18 to 24
*23 percent of those with household incomes under $25,000
*31 percent of African Americans
*32 percent of Hispanic-Americans

This compares with 58 percent of those with incomes over $75,000.

Altogether 40 percent of Americans said they had rainy day funds. Though, when you take a closer look at how much money is in some these funds, you hope for their sake, it won't rain long or hard.

Fourteen percent of those with emergency funds had less than $500 in them. Fifty-one percent said they had $2,000 or more.

What I found interesting was where people get the money for their funds. One quarter pay down expensive debt and then deposit the amount of their monthly payment into emergency savings. A third deposit "loose change" periodically, the survey found. And half--yes half!--said they deposit a portion of their tax refunds!

We'll see how I feel next year, after a few months of being hard up for daycare money.

In the meantime, if you're looking for truly BASIC advice on how to start saving, check out this handy guide from Plus, listen to Michelle Singletary's tips on painless savings. You can also set some savings goals with an online calculator.

By Annys Shin |  February 27, 2007; 10:30 AM ET Credit Issues
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The hard part about having savings is that if you are fresh out of college and recently married you have a lot of high interest debts that need paid off first if you want to come out ahead. Saving money at a low interest rate just does not make sense when you should throw all available money into paying things off and getting out of debt first. Once you have done that, then your dollars put into savings will mean more. You just have to have discipline and stick to it. You will get out of debt faster, and be able to save more money in the long run.

Posted by: Chris | February 27, 2007 11:02 AM

I hear you, Chris on the pressure to pay debt off, but you need a thin layer of cash for emergencies. It's OK if it doesn't rack up lots of interest, because if you don't have it when you need it, you'll pay even more on a credit card or an addition to a mortgage.

Posted by: Gonzo, MD | February 27, 2007 11:38 AM

That is what most would think at first, but if you put that money into the credit card you are reducing the interest on it by that much more. Use the credit card for the emergency at some point in the future, and you will be better off simply because you will have already been paying it off to a lower amount and reducing that nasty interest. Sure the interest will be higher on a credit card simply because you would have had the cash on the side for an emergency, but meanwhile that money is sitting there while the interest racks up and your debt continues to go up. The goal for Americans should be to get out of debt, then save. Unfortunately, we just keep digging and digging.

Posted by: Chris | February 27, 2007 12:21 PM


Interest is interest. If it's $100 or $1000 the interest you still have to pay it. At least with a savings account, you get interest, not pay it.

The object here is to get rid of credit cards.

Posted by: John | February 27, 2007 12:35 PM

Also, you can do both save money AND get out of debt. And least be clear, you can get out of short term debt, but long term (buying a house or houses) is debt that will be with you at least 15 years.

Posted by: John | February 27, 2007 12:42 PM

It all depends on the rates. It is foolish to save at a bank making 4% when you are being charged 19% by the credit card company.

Pay down (and off) the debt at the high rates BEFORE saving. Yes, you have no rainy day fund but if you need it, use the credit card. You've already "saved" on interest by paying down the debt so you would be in a better place.

For example, you could either put $1,000 in the bank for a rainy day fund (at 4%) or pay down credit card debt charging 19%. Further, assume you needed $1,000 at the end of one year when it became a rainy day.

If you saved, you would have $1,040 (assuming no taxes) so you could pull the funds (and have $40 left over). However, during the year, you paid 19% on your credit card debt and paid $190 more to the cc company. You are net $150 poorer (assuming no taxes).

If you paid down your card, you wouldn't have earned the $40 but you also wouldn't have spent $190 in interest. At the one year point, you could charge the $1,000 needed for the rainy day. At that point, you would be better than had you saved.

Posted by: Non Debtor | February 27, 2007 1:31 PM

I agree that getting into the habit of saving is very difficult. It was so tempting not to save that that was exactly what I forced myself to do before I even got my first paycheck by setting up auto saving and contribution plans. I never saw the money, and it's hard to spend something when you don't see it. I have x% sent to my 401K to get the full employer match. I have a set "bill" to pay monthly to my Roth IRA, and then I have a set amount auto savings plan that deducts money from my checking coincidentally when I receive my paychecks. I've set up pretty much the same system for my fiance, a notorious spender, much to his chagrin. He's contributing to retirement and saving from his paycheck automatically, too. We have no kids yet, but we are in our late 20's so it's on the horizon.

It's also equally difficult to decide whether one should pay off debt (all consolidated to very low interest rates of 6% or less), contribute more to retirement, save like mad for an emergency fund, or what?? I've opted for a combination of all three.

Debt is paid off based on whether or not the rate is expiring (the debt is largely not mine. It's my fiances but we're in this together.) It is tough to decide which helps us come out ahead and what to do when we hear "you gotta have 6 months living expenses" and read stories about how fleeting jobs and health can be on one hand and seeing credit card bills and car loans we could pay off sooner if we stopped saving, which would reduce our expenses and thus the size of our needed emergency savings overall.

The tax refund: I've always gotten one, though less from withholding and more so from tax credits in recent years. All helped boost my savings or pay down credit cards. This year, half will be saved to the emergency fund and the other half will likely pay some debt down. I agree it's better to receive than to give when it comes to Uncle Sam, but if you set up an auto save program, you can put the income that used to be withheld to hard work with every paycheck, and seamlessly at that.

The best thing people can do for themselves is to take a financial literacy course somewhere. You have to understand at a basic level about money management if you ever hope to take charge of your life. Especially women. Like the website says, A MAN IS NOT A FINANCIAL PLAN.

Posted by: CyanSquirrel | February 27, 2007 1:34 PM

Oh and while choosing to pursue all three concurrently doesn't make for fast progress in any one area, it does lead to huge improvements overall. Stick with it, give it some time, and adjust as new circumstances arise. The hardest step, however, is just setting yourself up to do anything at all.

Posted by: CyanSquirrel | February 27, 2007 1:39 PM

Non Debtor, that's assuming a perfect world. When you grow up you discover that the world is not perfect. $1000 for emergencies is being very conservative. And if you put that on a credit card because you have no savings, you are back at square one.

In your perfect world there is no debt. In the real world 89% of us has some sort debt and if you get into the payoff routine, you will never have a chance to save.

The best thing is to do both. Save and pay off. It may take a little long to get where you want, but your cover both ways in any event.

Posted by: John | February 27, 2007 2:26 PM

John, non-debtor explained it better than I, but the point still remains: If you save instead of paying off, that higher interest on the card acrues. Sure you have a bit in savings, but it does you no good if you owe twice as much because of the interest you racked up, and you only wind up further in debt. I am actually throwing every penny at debt and finding it goes away a lot faster. When I have an emergency I put it on the card and yes, it slows down the process, but not as much as setting aside that money would. Do the math like non-debtor and myself and you will be surprised how much more money you will have saved by not having savings.

Posted by: Chris | February 27, 2007 2:53 PM

Can't you contrbute to savings, and pay down the debt? The debt is still due if you get laid off, or have an extended work absence. Yo can use the savings to help pay off the debt. In the meantime, don't add more debt.

Posted by: Savings, yes | February 28, 2007 8:12 AM

I find it amazing that ONLY 60% of those with what might be considered a high income have any savings.

We just plain spend too much.

Posted by: RoseG | February 28, 2007 10:53 AM

"I am not looking forward to being the one shelling out versus being on the receiving end." Umm... you ARE shelling out, they government has just managed to pull the wool over your eyes with withholding. Frightening how successful that is. If everyone had to write a check to Uncle Sam every April, things would surely be different.

Posted by: GHF | February 28, 2007 6:23 PM

Saving is a good habit, please view this guide to saving

Posted by: Calvin | March 9, 2007 2:12 AM

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