The Effects of Not Saving

A penny saved is a penny earned, right? Well not quite, the famous quote by Benjamin Franklin has been misquoted for decades; what Franklin actually said was "A penny saved is twopence dear. A pin a day's a groat a year." A twopence was a silver coin used in Britain during that era and a groat was the hulled and crushed grain of various cereals. Somehow, we managed to morph the original quote into something totally different over time but for simplicity purposes, let's coin this phrase: "A penny saved is a penny saved" - quote unknown.

The cost of an emergency will vary (inexpensive to very expensive) and emergencies don't stop because you have inadequate savings, often during moments of pandemonium, emergencies seem to multiply for some. Access to savings to cover emergencies such as car repairs, medical bills, home repairs and unexpected job loss make sense to many but so many neglect to establish a savings to do so. The effects of not saving can become costly, for example a car repair of $1,500 comes up but you have no savings to leverage the cost. You can either borrow the funds (personal loan) or use your credit card to handle the issue. In both cases, you will likely spend more than $1,500 once the interest and finance charges are factored in if you take longer than 30-days to repay the balance. On-top of the cost to borrow the funds, you will notice a decline in your credit score (if you borrow new money, your total debt outstanding increases which raises your debt-to-income ratio which leaves less discretionary income for other things OR you use your credit card, the balance increases by $1,500 which increases your total debt outstanding as well as your utilization rate on the revolving debts you have. All mentioned actions negatively impact your credit score as well). The new credit score that's distressed momentarily will make the cost of new money much higher until the score bounces back which means less money to save into the foreseeable future. Question, are you taking each opportunity to save money when possibly? Just because you can't allocate a lot to savings doesn't mean you should allocate nothing to savings (when the opportunity to save money presents itself you should graciously accept it and save it). There's no real rule of thumb to how much to save but being practicable helps, if job security is stable, you may want to save 3 to 5 months of monthly expenses to offset possible emergencies as they occur and if its unstable you may want to save more.

Today, the U.S. savings rate as a percentage of disposal income is 4.2% in July 2012 (i.e. net paycheck of $2,000 would equate to $84 saved). The 4.2% rate is lower than the prior month's 4.3% rate and July 2011 rate of 4.7%, our suggestion to those who are able to save is to do so 2 to 3 percentage points more (6.2% to 7.2%) than the national rate. Historically, the U.S. savings rate will trend higher during recessionary periods (as households are worried of possibly job loss) and lower preceding it (economic prosperity driven by us spending more and saving less) so let's aim to be ahead of the curve by saving a little more during periods of certainty and uncertainty.

Please click here to see images enlarged

During the month of August, we had the opportunity to provide our expertise on financial matters involving small business and individuals. Click the links below to read the articles and be sure to click the Facebook, Twitter and Google Plus button to share to many. Thanks!

Fox Business (All That Glitters Isn't Gold for Some Olympian Parents)

CreditCards.com (Financing your small business with plastic: A capital idea?)

CreditDonkey.com (7 Rich Celebrities Who Went Broke)