Saving for a Rainy Day in the Middle of a Thunderstorm

Sun Trust has an ad showing now that says some people woke up and stopped trying to keep up with the Joneses, stopped wanting flashy and started wanting solid.

Thanks for the heads up Sun Trust. Oh wait, it’s not foresight, it’s hindsight.

It seems that as long as people aren’t content to have an average amount of wealth, the economy is always going to be cyclical. And it seems that the best time to have money to spend is during a recession because everyone’s lowering prices. To most Americans, this is a paradox – how can someone have money to spend during a recession? Well, it starts by saving money during more prosperous times.

For those of who don’t know what I’m talking about when I talk about “savings”, don’t feel bad because you’re not alone. “Savings” refers to money that is put aside for future use, whether it be for a large future purchase, emergency, unemployment, or retirement. A survey released in 2008 by the American Savings Education Council and America Saves revealed that only 62% of people have “a savings plan with specific goals” while 47% of Americans save less than 5% of their incomes but only 43% thought that they weren’t saving enough for retirement.

So that means the 4% of the US thinks less than a sub-5% percent savings rate was sufficient for retirement. But I’m sure that 4% are the richest 4% who are still saving millions even though it reflects a small portion of their income. NOT. The study also shows that the higher your income the more likely you are to save, and save at higher rates. So the rich get richer – not only because they make more money, but they also save more money – and the poor get poorer.

In the end, at lot of it comes down to education. Typically, the better educated you are the more money you make. It should come as no surprise then that the individuals with the highest incomes save the most. In fact, education is likely to be the confounding variable. Certainly saving more money is easier with a larger income, but it is both possible to do with a smaller income and not to do with a large income. While not all professional athletes are stereotypical dumb jocks, many are not scholars either, and about 60% of NBA players go broke within five years of retirement.

Not only does a better education teach people to save to prepare for the future, but it also prevents them for falling for budget-breaking scams – both legal and illegal. Predatory lending obviously preys on the uneducated, but so do payday loans and even the lottery. The lottery is a horrible investment – if you can even call it an investment. A typical return on the Mega Millions lottery is about $0.50 per $1 you spend; see http://www.durangobill.com/MegaMillionsOdds.html for all the math. How many people knowingly make an investment that is EXPECTED to lose 50% of it value? Personally, it’s great for me that other people are making charitable donations to the government so I have to pay less in direct taxes, at least until the government has to pay unemployment and welfare. And then everyone is forced to foot the bill.

So start saving for the next recession now so when the price of your dream home, car, or even flat-screen TV drops, you’ll be ready to buy – with cash, not credit.