Saturday, September 5, 2009

Geese and Ganders in Budgeting

President Obama announced new initiatives today to help citizens save more money for retirement, making it easier to contribute to IRAs and 401(k) programs. I applaud his administration's efforts. An administration official (not named in the Reuters article I read) was speaking about the personal savings rate which has risen to 5% today from as low as 0.8% in April of 2008, and has even been negative in recent history. He said, "Right now the situation in national savings is unsustainable." He also called the negative savings rate, spending more than we make, of past years a "major macroeconomic challenge."

It's so amazingly refreshing for someone in government to say that it's not okay to continually spend more than you bring in, and that it's unsustainable to do so. Overspending increases your debt load, and increases interest payments to loans rather than paying for goods and services. When expenses exceed income it is called deficit spending.

Having a positive savings rate as individuals is absolutely critical as we make our personal budgets, and a positive savings rate is the result of having, of all things, a balanced budget. But wait. To go from zero to a positive savings rate, you also need to have something left over and unspent. That leftover is what you use to either pay down the debt you've built up in the past, or to build up savings. That unspent amount is the 5% mentioned above.

The really slick part is that once you've paid off your debt, your cash available to spend on goods and services goes up by whatever you used to be paying in interest. Then if you build up a nest egg of investments, the interest from those investments can either accelerate your savings or become additional spending money. So eventually, you can get to the point where you have everything you did while spending yourself into ever-increasing debt, but without actually going into debt to do it. Neat trick, isn't it?

It's the difference between sacrificing for the future, and sacrificing the future. To make this work, those who are overly fond of deficit spending (on a personal level or otherwise) need to trade in their audacious chutzpah for a backbone, sort of like a Cash for Clunkers program.

1 comment:

Kelly said...

Your title is so appropriate. :)