Unification News for August 1996


The Savings Cycle

by Simon Kinney-NYC

In American society, it is a commonly held notion that we are citizens of the world's most powerful and influential country. Over the past decade, we have become victors of the cold war and other global vagrances. We have gained a lead in global industries such as computers through our own breed of democratic empiricism, much to the chagrin of other nations less materially fortunate than ourselves. The Financial markets of the U.S. have also out-performed those of every other nation.

Which brings us to an embarrassing fact; out of all the developed nations, Americans are amongst the worst savers of their own finances. From disposable income which often times eclipses the average of many other nations, we save only 4.6 percent. That compares to 10.8 percent for Canadians, 12.3 percent for Germans, 14.1 percent for the French, and 15 percent for the Japanese.

As church members who are often involved in missionary work, it is sometimes difficult to imagine planning for the long term in any shape or form, however sometimes a little stricture in resources and a little structure in the way ahead could add up to be more than you might first imagine.

To show the mistakes that people make, I am going to start by taking the example of someone whose cash flow appears to be relatively abundant. Take Joe Apple, a financial planner working on Wall Street in Manhattan. He is 45 years old. In recent years, his income has accelerated to its present level of around $80,000 a year. He has just traded up to a 3,000 sq. ft. loft in Tribeca and spent more than $40,000 on renovating his home in Long Island which badly needed repairs; but his total savings last year came to less than $2,000.

He still has not started saving for his retirement or his two children's college education. He knows that he's not saving anything but feels that there is always something that needs to be bought for the family.

Sound familiar? The average household in America has a net worth of $9,505 according to the Government. By the time people reach age 65, it's no more than $25,000.

Even with current inflation, which is fairly low, people will accumulate on average around 30% of what they need by the time they retire. If you take out social security and a pension (which may not be there in the future anyway), it drops to a delightful 11%.

Financial planners will generally tell you that if you're over 40, you will need to save 70 to 80% of your income to start retirement when you're 65. That means that the bread winner who today earns $50,000 per year will have to save around $37,500. If you assume 3% for inflation, that translates into $58,423 per year in 2011 dollars.

The person who is 40 years old who needs $37,500 in today's climate will need $78,516 in 2021 dollars.

Buy Now, Save later (maybe)

Even if our resources are very limited, which for many of us it may be, no saving at all now means threatening the future of our collective society. Even after we rightly tithe and assist in as many important areas as possible, a very small but consistent savings plan can bring relief later on, especially for our children. It's not so much a matter of how much is coming in the door that really counts, but how much of a sound planning strategy you might make, even if it is $100 or $200 a month. Over an extended period of one or two decades, it becomes quite considerable with compound interest and wise placement of the funds.

America is gripped by consumerism gone mad. The syndrome of instant gratification and the "we want it now" battle cry are guaranteed to throw you into the ditch.

The Big Bull, Merrill Lynch tells us that 62% of people aged between 25 and 45 know that they could save twice as much if they just put their mind to it, irrespective of what kind of income they have.

The notion of spending today at the cost of tomorrow might be the only alternative in some situations, and for certain we especially face this on numerous occasions. However it may still be possible to bring some balance into the ball park.

Let's take John, a construction consultant on the West coast who is affiliated with the movement and his wife Barbara, who runs a flower business. Combined, their income is $85,000. They had to recently run for help after piling up a massive $64,000 in credit card debt. It may sound outrageous, but its very easy to do if you have an abundance of plastic in you wallet.

How did it happen? Well, it's a surreptitious process. Little by little you get use to a certain pattern of living which may not be within your means.

Their expenditures included $155 a month for cat food!, food for their pet bird, a trip to Africa, a foreign time share which they wanted to get out of, but it cost more to get out than it did to stay in, and a satellite dish on their roof.

Another member in another part of the country, accumulated $50,000 in credit card debt because he could not find another way to pay for what he needed. At 21% interest per annum that becomes rather unwieldy. Most definitely, many lending agents are culpable of lending money at high rates of interest to people who are not in a position to carry the burden, which adds to the inflationary spiral and the national debt.

The increasing cost of College education for our children is another reason for some careful planning where possible, especially for people thinking about Ivy league institutions which have become outrageously expensive.

It has become an increasing tendency for families who have two incomes, albeit moderate, to spend a lot of their money on services. This is because they are trying to save time. A family might spend a considerable amount on take-out meals, child care, and other expensive services that free the adults to have a job and an income. People feel so rushed all the time that it is a matter of convenience to use services of this nature.

Unfortunately, a lot of these expedient services are charged to the little plastic magnet in the wallet. As a result, credit card debt in America has grown from $151 Billion to $281 Billion in the last five years, and the average household has a dozen or so cards.

Many lenders have become lax about the requirements for having a card, and everyday, the mailbox is stuffed full of "great" offers and rates which promise an opportunity of a lifetime. They advertise a rate of 6%, but then in very small print is the fact that after 6 months, it reverts to 20%. Of course they don't want you to see that, so they put it in small print. Most of the time they manage to dupe the unsuspecting customer. Beware!

What are the best ways to save?

Many of us don't realize that you can reduce the burden of saving by investing in what is commonly called tax-advantaged accounts or growth oriented investments that can make your money grow quickly. Remember, you don't need a lot of money to do this. Any amount, no matter how small, can be utilized this way.

For example, a large percentage of us earn under $30,000 per year. However a lot of people in that bracket don't realize that, at that income level, you can deduct contributions to an Individual Retirement Account (IRA). As a general rule in America, and this would also be the case in the church, less than one person in every ten would feel knowledgeable in selecting between different investment options.

Becoming knowledgeable does not mean that one has to become a financial guru by any stretch of the imagination. It is simply is a matter of having a basic understanding.

If we don't have anything, social security will help us

Hmm, sorry, but that's a big mistake. The bad news on that front is that by the year 2013, the social security system will be paying out more than it takes in. By 2029, the program will be out of money completely, and that doesn't even count for the fact that the Government is already spending the social security surplus to balance the budget. That makes sense. Huh!?

The Government doesn't really help

Unfortunately, the U.S. Government doesn't really offer much incentive to save for the long term. They restrict the amount you can make in IRA's etc. which unfortunately causes less people to put their money in those places.

Solving the problem

Irrespective of the nation's predicament, there is quite a lot we can do to help our personal and community situation.

Talk to a financial adviser as to how much you and your family could reasonably save. The result will vary depending on the different income bracket and different ages.

By the time one is in their 40s and 50s, you might want to come up with a precise figure that fits your goals, which takes into account any sudden changes in lifestyle that we may face even on a regular basis.

It's not difficult to come up with the numbers yourself, taking in the various factors of inflation, interest rates and other variables. Get a personal finance software program like Quicken for example. You can also use a common financial calculator, which has the preset values to compute the effect of inflation in different scenarios. If you don't want to spend the $40 to get one, ask a real estate broker or an accountant to lend you one.

When talking to a financial adviser, there are four basic things to clarify:

1. Decide how much you will you need when you are beyond working age.
2. Calculate the size of the savings you will need to meet your income goal.
3. Find out if your plan is on track.
4. Figure out how to catch up.

For most people, the biggest reason for not saving is simply procrastination. The answer is to start now. Even if it is a very small amount, consistency is the key.


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