Save or pay off debt?
We should be able to do both, but the tight economy forces you to make choices and right now, most Americans are more concerned with paying off debt.
The National Foundation of Consumer Credit (NFCC) says 89 percent of more than 2,900 respondents value paying down debt over saving money. Only 11 percent said increasing savings was more important than paying off debt.
“People often debate which is more important, to be debt free or to have a robust savings account, and the answer is both,” said Gail Cunningham, spokesperson for the NFCC.
“As important as it is to handle debt responsibly, the truth of the matter is that the unplanned emergency is inevitable, and savvy consumers will recognize this and prepare for it,” she added.
If it’s possible.
Unfortunately, for many facing unemployment or reduced employment, that’s just not possible. It is difficult to save during times of inflation and job loss.
Each person only has a certain amount of disposable income, and when he or she has to pay more for everyday commodities, it cuts into the amount available for saving.
The rate of savings once increased during difficult economic times, as consumers begin to cut back on their purchases. Not today.
In January 1959, the first month that the Bureau of Economic Analysis provided savings data, the personal savings rate in the United States at that point was 8.3 percent of disposable income, equating to the average person saving approximately one-month’s take-home income per year.
Now, the savings rate now is approximately 5 percent.
It’s not just that the economy is so tight. Access to credit makes people more comfortable with their lack of savings.
“Credit replaced savings as the family’s safety net, with some arguing that savings was unnecessary since they could charge or borrow their way out of any unplanned event,” continued Cunningham.
Times are different now, and consumers know it, with the new normal for credit shaping up before our eyes. Access to credit has diminished totally for some, while credit lines have been lowered for others, making reliance on credit as a rescue tool in an emergency not an option for many.
AS NFCC’s survey reveals, controlling debt has become paramount and new purchases are more likely to be paid for with a debit card instead of a credit card to keep personal debt at a manageable level and free up money for savings.
Consumers have learned the lesson about over-spending. Now they need to focus on saving.
Once creditors are paid off it’s time to begin or build up personal savings in the following five key areas:
• Rainy day fund. This covers the everyday life emergencies such as home or vehicle maintenance, insurance co-pays and deductibles, medical emergencies and the like.
• Income replacement account. This sustains you if there’s a job loss or reduced income.
• Mortgage down payment. The more you have down, the better your negotiating position for a mortgage.
• Known future expenses. Plan in advance for upcoming major expenses such as education, vehicles, vacations and other known expenses.
• Retirement. You need to start planning today to secure your tomorrow. Small amounts invested over time can make the difference in how you live during your senior years
“In bad times, people save out of a fear of tomorrow, and in good times they spend as if there were no tomorrow,” said Cunningham.
“To turn this savings/spending cycle into financial stability, consumers should recognize the unarguable importance of savings and develop a systematic plan to meet their personal savings goals,” she added.