Money. Purpose. Joy.

In this Issue:

• Shock Treatment for Prospective Savers
• Where’s the Money?
• The Home Stretch
• Today’s Hot Investment: Cash

---

Shock Treatment for Prospective Savers

Much has been made of the average American’s less than stellar track record of building savings. In the 6/17-18 issue of the Wall Street Journal, reporter Ron Lieber shared what “shocked” him into saving early in life. He saw a chart comparing how much a person would accumulate by age 65 if they invested $250 a month and earned 8% annually beginning at different ages. Starting at 25, the person would net nearly $880,000. Waiting until age 35 to get started, they’d end up with less than half—$375,000. Procrastinating until 45 drops the figure to just under $150,000.

Matt’s View

This isn’t meant to discourage anyone over 25, or overwhelm anyone who can’t come up with $250 per month. The point is to get in the savings game, and to do so as early as possible. If you’re 45 and haven’t done much in the way of saving, better to start now than when you’re 55. Where will you find the money to save? Check out the next article.

---

Where’s the Money?

Why is our savings rate so low? Lack of motivation? Denial about the need? A penchant for big screen TVs? In its 6/21 issue, the Wall Street Journal fixed the blame on our housing and transportation spending. It cited government figures showing that while the portion of our spending devoted to many categories has fallen or remained flat over the years, our housing and transportation spending has grown. Together, the two categories accounted for 52% of our spending in 2002-03—up from less than 41% in 1950. While homes and cars are more realistic options for most people than pup tents and bikes, the article said most people could easily dial back spending in those categories: “If you’re willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did—and you will free up money that can be saved.”

Matt’s View

Our transportation spending can be explained, in part, by a comment from Charles Kettering, a former general director of General Motors’ Research Labs. In the late 1920s, he was quoted as saying business needs to create a “dissatisfied consumer.” Its mission, he said, is the “organized creation of dissatisfaction.” GM’s contribution to the cause was planned obsolescence—annual model changes designed to make us dissatisfied with what we’re currently driving. It’s a big reason why we trade in our cars after just 4 years on average. One way to add efficiency to our money management is to keep cars for at least 10 years, finding satisfaction in having money in the bank more so than in having wipers on our headlights.

---

The Home Stretch

The conventional wisdom tells us to stretch to buy as much house as possible. A lot of people who followed that advice in recent years through the help of adjustable rate mortgages (ARMs) are now feeling some pain from all that stretching. With interest rates now rising, it’s not uncommon for people to see their monthly payments shooting up 40% or more. On 7/2, The Chicago Tribune quoted a research economist at the Real Estate Center at Texas A&M University who recommended that anyone with an ARM should refinance into a fixed rate mortgage within the next 18 months.

Matt’s View

Switching to a fixed rate now will help avoid the pain of future rate hikes. However, it will likely come with a higher monthly payment than people with an ARM were paying at the beginning of their loans. And some people won’t qualify for a new loan, so if they can’t afford the higher payments, they may have to sell their home or risk losing it through foreclosure.

Two rules of thumb regarding home buying: First, don’t buy unless you can afford a down payment of at least 20%, and second, don’t take out a mortgage for over twice your household’s annual realized income. The second guideline is from the authors of “The Millionaire Next Door,” a fascinating look at the habits of the truly wealthy. Both recommendations probably seem radical in an era when 100% financing has become common. But making sure your mortgage is manageable is important if you want to do something even more radical, like build savings.

---

Today’s Hot Investment: Cash

Certificates of deposit and money market mutual funds were once among the dowdiest of all investments. In fact, most financial professionals wouldn’t even consider them investments. Today, if not king, cash is at least getting some respect.

The personal finance pages of numerous publications are touting the fact that rates for many CDs and money market mutual funds are now topping 5% and may head higher. With the stock market offering a particularly bumpy ride of late, a 5% return with no or little risk has some appeal. As Jean Chatzky wrote on the MSNBC web site recently, “If you have $50,000 earning bupkis in checking and you move it into a money market account yielding 4.5% annually, you'll have $52,250 a year from now. That $2,250 could pay off a credit card, make an IRA deposit or take you on vacation. In other words: It's real money.”

Matt’s View

“Bupkis,” for those not up on their Yiddish, means “beans.” More to the point, no one is suggesting building a retirement account with just CDs and money market mutual funds. However, if you have money in a low-interest bank savings account or too much money parked in a checking account (more than enough for monthly bill paying), you’ll likely do better with your bank’s money market account and even better with a money market mutual fund. As for CD’s, one Chicago-area bank recently offered a 9-month CD at 5.75% APY. If you’re tempted by a CD offered at a bank other than the one where you do business but don’t want to spread your accounts around, a number of banks are matching competitors’ rates. See if yours will do so by bringing in an ad showing the other bank’s offer.

Subscribe Now
Browse the Archives