Monday, October 22, 2007

Saving: The Worst Thing an American Could Do?

by Thom Fox
Community Outreach Coordinator
Cambridge Credit Counseling Corp.

Many investors were excited in September by the news that the Federal Reserve had cut interest rates; however, average Americans may not fully realize the impact these cuts may have on their wallet. There will be some winners –
some homeowners with adjustable rate mortgages, for example, but there will be losers as well - those with Certificates of Deposits and traditional savings accounts.

Interest rate cuts not only affect the amount a consumer is charged to borrow money, they also tempt people to go out and make additional charges, reducing any inclination they may have had to actually start saving money. Our national savings rate is negative 1%, meaning that we’re consuming more than we earn. In light of this fact, these cuts do little to promote the establishment of healthy savings.

Americans used to save nearly 10% of their income every year, but that mark fell into the negatives two years ago. Why? A major factor is the amount the average consumer spends servicing credit card debt, roughly 11% of their disposable income. In looking at the move the Federal Reserve has made, essentially soliciting consumers to get further into debt, one wonders - will a focus ever be put on savings?

When a person is committed to establishing savings, they become more disciplined with their money. That commitment promotes a realistic attitude toward finances that helps individuals live within their means and not beyond them.

At one time in America, a homebuyer couldn’t get a mortgage without a significant down payment, traditionally 20%. In recent years, however, mortgage companies began offering 100%, or even 110% financing. In the absence of the 20% requirement, prospective homebuyers quickly got out of the habit of saving, and now many struggle to save even a minimum down payment of 5%. For an average home worth $250,000, for example, a 5% down payment would require a deposit of $12,500. But even that modest figure would be beyond the reach of Americans whose savings mentality eroded during the years of easy credit.

Placing an emphasis on savings could have prevented the turmoil facing the American markets today. If consumers understood that building savings is a necessary component of the American Dream, more people would take it seriously, and they’d be able to avoid the predatory practices of disingenuous lenders looking to profit at their expense.