Invest time in creating a regular savings plan

PERSONAL FINANCE

Dollars & Sense

March 04, 2001|By Eileen Ambrose

SOME discouraging facts about the finances of American families:

More than half live paycheck to paycheck - at least part of the time.

The typical household had net assets of less than $10,000, including retirement accounts but not counting home equity.

Also, low- to moderate-income families actually lost wealth during the late 1990s despite the roaring economy. Households with income of $10,000 to $25,000 saw their net assets - which includes home equity - shrink 23 percent to $24,650 between 1995 and 1998.

These are some of the main points of two studies by the nonprofit Consumer Federation of America, which recently launched a campaign to encourage savings. The "America Saves" campaign largely targets low- to moderate-income households, those families that will be especially vulnerable if the economy continues to drag.

The CFA based its findings on 1998 Federal Reserve data and a survey conducted last year.

The group found that although 53 percent of all those surveyed said they lived paycheck to paycheck at least sometimes, 64 percent of moderate-income respondents and 79 percent of low-income individuals said they did. In addition, 60 percent of those surveyed said they don't save enough for their future.

Stephen Brobeck, CFA executive director, partly blames today's consumption culture and easy access to credit for why people don't save.

Many nonsavers point to a lack of good saving opportunities, Brobeck said. The stock market seems inaccessible to them, and many are discouraged to see the small earnings on their bank deposits eroded by fees, he said. Sometimes, he said, a person's effort to save isn't supported by friends and family.

Among the bright spots in the CFA's research is that an overwhelming majority want to save, and roughly half of low- and moderate-income families said they think they can save.

Financial experts agree that even those with limited resources can squeak out savings. Among experts' savings tips for low- to middle-income households:

Develop a financial plan. This is a key to success. The CFA found that in households earning $100,000 or less, those with a plan saved twice as much as those without one.

A plan doesn't need to be complex, but it should be written down, experts said.

Individuals should start by taking stock of their financial situation, looking at what money is coming in and where it's going out, said Steve Thalheimer, a Silver Spring financial planner who focuses on middle-income clients.

The next step is to establish one or more goals, figuring the cost and setting a timetable to reach those aims, he said.

Those without dollars to put toward goals will need to create a budget and find expenses to cut to free up money, Thalheimer said.

Goals can be a mix of short and long term, he added. Short-term goals can include saving for a car or vacation, or putting aside enough to make a $2,000 annual contribution to an individual retirement account.

An advantage of setting a short-term goal is that, once it's achieved, it can motivate people to continue saving, experts said.

Pay bills on time. Spare dollars can be eaten up by late fees on rent, utilities, car payments and credit cards, said Pat Finch, an extension educator for Maryland Cooperative Extension in Baltimore. Credit cards, for instance, charge on average $29 per late payment. Late payments can also trigger higher interest rates.

Save money by using a calendar or some other system to track when bills are due, Finch said.

Buy savings bonds. If fees and a low-interest rate on deposits keep you from opening a savings account, try savings bonds that offer favorable yields, Brobeck said.

The Series I bond, tied to the inflation rate, can be purchased for as little as $50 and now earns 6.49 percent. Savers can buy a Series EE bond, which currently pays 5.54 percent, for only $25.

Another advantage is that earnings aren't subject to state and local taxes, although federal taxes will be due when the bonds are redeemed.

Pay off plastic. You can save thousands of dollars in interest charges by not carrying a balance on high-rate credit cards, according to the CFA. For example, if you make only minimum payments on a $3,000 balance at 19.8 percent interest, it will take 39 years to pay off the debt and cost more than $10,000 in interest.

Small steps work, too. People often are so overwhelmed by how much they think they need to save or by so many financial goals that they don't save at all, experts said.

"One of the biggest mistakes is to think it's all or nothing," said Gerri Detweiler, author of "Slash Your Debt."

Saving can begin with modest steps, she said: "Even if it is just $5 a week, that's OK. That's a start."

One small step is to put spare change into a jar each day, Detweiler said. By month's end, you may have $25 or more that you can deposit in the bank, she said.

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