Tuesday, 31 Jan 2006
According to the Orlando Sentinel staff writer Richard Burnett in his article, “Americans spending more, and saving . . . nothing“, Americans are not only failing to save money for the future, they are actually spending heavily enough to dip into their existing savings or home equity. In his article, he states that the savings rate for last year, -0.5%, (yes, that is a negative savings rate), is the third lowest in U.S. history. The experts’ take on this willingness to spend beyond our means is that rising home values have given Americans a false sense of financial well-being.
I suppose the reasoning would follow something along these lines:
- Mr. Smith bought his home for $150,000 four years ago.
- Thanks to the real estate boom, his home is now worth $250,000.
- He is now $100,000 richer, even though he has no emergency fund or savings.
I remember reading in Rich Dad, Poor Dad that popular “assets” such as a home that serves as a primary residence don’t really count as an asset as you gain no income from it unless you are living in just one bedroom and renting out the others for a high enough rate to turn a profit after the mortgage and other bills are paid. In practical terms, Mr. Smith won’t see that $100,000 he thinks he has unless he sells his home and moves into another home that costs $150,000. If he upgrades to a $250,000+ home with the profits from his original home’s sale, he still doesn’t have any more disposable income than he did when he started. Because home values *have* gone up, homes in the $150,000 range would now be a downgrade from his just-sold property unless he also moves to a cheaper part of the country.
Because of this, I prefer not to count the value of my home or any other possessions in my calculation of my net worth. (All right, I don’t actually OWN my own home yet, but when the prices level off I’m sure I’ll be pulling out my VA home loan guaranty paperwork and going home shopping.) With the notable exception of real estate, most purchased items have a resale value that is significantly lower than the original price paid. I just stick to adding up what I have in my IRA, 401(K), savings, and checking accounts each month after the bills are paid and the credit card balances are subtracted, if applicable.
Burnett’s article is about personal savings. I am not clear as to whether this includes retiremement accounts or not, but since he seems to cover both an emergency fund for lean times and a nest egg for future retirement, I’ll assume that he’s talking about both types of savings.
I don’t know about you, but as a single working gal with no dependents, I don’t think there’s been a single month I haven’t been able to at least set aside the maximum monthly contribution for my IRA account since I was a 21-year-old Private First Class pulling in just $11,000 a year. Currently, I am still maxing out my Roth at $333/month, putting aside 4% of my gross income into my 401(K) to get the maximum company max, and saving $200/week into my Emigrant Direct savings account (4.25% APY!) until I hit my $10,000 emergency fund savings goal. After that, I’ll be dumping the extra $200/week back into my 401(K) to the maximum 15%.
Am I deprived of all amusements and eating nothing but rice and beans in order to save $1333 per month?
Hardly.
I eat six (yes six) great meals a day, pay for a monthly gym membership, pick up new clothes when I need them, pay for my cats’ food, supplies, and veterinary fees, go to movies, acquire new video games and software periodically, replenish art supplies, go a bit nuts ordering gardening stuff, purchase books and music, pursue hobbies that interest me, hang out with friends and allot enough money for gifts and vacations.
What I don’t do is lose track of how much I can afford to spend once my living expenses and savings contributions are taken out of my paycheck.
And here are some of the other things I don’t do or buy–no doubt some out there would consider these examples of deprivation, but I can’t say that I’ve even noticed their lack…
- I don’t drink alcohol, except for free wedding reception champagne, and most of the time I just pretend to sip and go back to water. Champagne…blech!
- I don’t use tobacco in any form.
- I don’t get a new car every three years, or even every ten years. I drive my Hondas until the bolts start falling off and I have to keep the car moving by running with my feet through the floorboards a la Flintstones, many many years after the vehicle is paid off. Then I buy another gently-used Honda for several thousand dollars less than what the original owner paid for it new. :whistle:
- I don’t make major purchases without entering a test item in my personal finance program to see if I can actually afford it.
- I don’t eat out more than once or twice a month. This entails a lot of cooking, but I kind of enjoy the sense of self-sufficiency that being able to prepare my own meals gives me.
- I don’t drink much else besides Brita-filtered water.
- I don’t pay full price for anything unless I have no choice. This includes groceries, clothing, electronics, media, travel, restaurant meals (the Entertainment coupon book is my friend here), fitness gear and supplements, medications, and even kitty litter.
- I don’t upgrade unnecessarily (too much) anymore. I try to use things until they are beyond any reasonable expectation of repair or duct-tape patching. This is one I’m still working on since I still feel tempted to upgrade graphics software and computer hardware annually.
- I don’t pay bank fees or interest on carried revolving credit balances.
- I don’t buy premium cosmetics, hair products, jewelry, clothing, or other major luxury items.
- I don’t acquire new books, games, and gadgets without first assessing what I have, if I really need/want the new items, and if I can offset the cost by selling the stuff I already own.
My ultimate goal is to live well in the present but retire with a tidy 2 million dollars or so in my retirement account to support me very comfortably for the next 30+ years and a home that is completely paid off. Where else, after all, am I supposed to put my posh home gym, invite my young Hugh Jackman-lookalike personal trainer, and raise the 30 or so cats I expect to have acquired by age 65?
Just kidding!
About the cats anyway…