Why Is It So Hard To Save?

We have been hearing for years that the nation’s savings rate is either near or below zero.  Frankly, I do not blame people for not saving, especially now.  My savings account with the highest interest pays only 3% APR while the lowest pays just over 1% APR.  Most debts people have, from their mortgages to their credit cards, are at a much higher interest rate.  Worse than that, though, is the bite of inflation.  With the yearly inflation rate around 4%, every year the money in my savings accounts is worth less and less, even with the interest being paid in.  Economically speaking, it is not rational to save when the money you save is decreasing in value faster than you gain interest.

However, all of that is really just mumbo jumbo.  The real reason it is hard to save is because of the way everything we buy these days comes with a monthly payment.

Here is what a typical household’s list of monthly payments may look like:

• Mortgage/Rent
• Gas bill
• Electric bill
• Cable bill
• Home phone bill
• Cell phone bill
• Internet service bill
• Car payment
• Condo/Home owner’s association fee
• Credit card bill
• Newspaper subscription
• Magazine subscription
• Netflix/Blockbuster subscription
• Subscription to an internet site

That is quite the long list.  Add it all up, and it does not leave much room every month for putting aside money for savings.  Sure, lots of people have their retirement money deducted from every paycheck, but nice liquid savings are harder to put aside for a rainy day.

Let us return to an old adage:  Pay yourself first.  Make your savings account one of those monthly payments, and make it a high priority one.  I get “fun money” for myself every paycheck that goes into a personal account of mine, not the joint account my wife and I both use.  I can use the money for anything I want, but I put aside abot a third of it every paycheck into a savings account so I have money to buy birthday, Christmas, etc. presents for my wife.  Otherwise, I would end up spending the money on fun things for myself.  It is the only way I can stay disciplined enough to save.  Try it some time.

Down With The Payments

Most people think of mortgage companies requiring a down payment as a way to protect the lender. They even require you to buy insurance if you cannot make the 20% down payment requirement. Standing on the outside watching the mortgage meltdown, I see things that could have been prevented if only people had made significant down payments.

WARNING: MATH AHEAD!

Say I bought a house four years ago for $500,000, not too unreasonable for the Washington, DC area. If I borrowed the entire amount with an ARM and a low teaser rate hoping to refinance into a fixed-rate mortgage and my house lost 10% of its value bringing it down to $450,000, I would be stuck with an upward-adjusting interest rate on a $500,000 loan and an increasingly bad financial situation. However, if I had made a 20% down payment, I would have only owed $400,000 on a house now worth $450,000. That would have given me room to refinance and let me prevent a larger jump in payments.

So:

$500,000 – $0 down payment + rising interest rate – drop in house value = you are screwed

$500,000 – $100,000 down payment + rising interest rate – drop in house value = you may be able to pull it off

The other side to the 20% down payment coin is that accumulating enough money to make that down payment requires you to be fiscally responsible enough to gather that money. This is something that has been neglected recently with 80/20 loans, piggyback loans, and/or loans for 100% of the value. They allow people with enough income but not enough discipline to get loans they are unable to keep up with.

Equity is something you should start with in a house, not hope to accrue through a rise in property value and a long history of payments.