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Late
last year, something happened in this
country that had not occurred since
1933: The nation's personal savings rate
went negative. And we do not even have
much company in our spendthrift ways:
Our savings rate was the lowest in the
industrialized world, according to the
Organization of Economic Co-Operation
and Development. Yikes!
What is behind this lack of
savings? Many factors are involved, but
some experts say that last year's
extreme situation was caused, in part,
by skyrocketing housing prices.
Apparently, as home values have
increased rapidly, homeowners feel more
comfortable spending money, assuming
that, if they ever need to, they can tap
into the equity of their homes.
But this is not a good idea.
While the housing market has indeed been
hot in recent years, it can, and will,
cool down. And in any case, it's risky
to depend on your home equity to help
meet your financial needs.
How can you increase your
savings? Consider taking the following
steps:
Build an emergency fund.
Try to put away six to 12 months' worth
of living expenses in a liquid vehicle,
such as a short term investment money
market account, to pay for household
emergencies. By having these funds
readily available, you will not be
forced to dip into your savings or run
up big credit card bills. However, you
may find it hard to set aside money for
your emergency fund after you pay all
the monthly bills. That is why you might
want to establish a bank authorization
to automatically move some money, even
$50.00 a month, for starters, from your
checking or savings account into a short
term investment. It's painless, you will
not miss the money, and you will be
surprised at how much you can accumulate
over time. Keep in mind, though, that a
systematic investment plan does not
assure a profit and does not protect
against loss in declining markets. You
should consider your ability to continue
investing through periods of low price
levels.
Boost your 401(k)
contributions. Are you putting in as
much as you can afford to your 401(k) or
other employer-sponsored plan? At the
very least, contribute as much as
necessary to earn a matching
contribution from your employer, if one
is offered. This type of plan typically
offers tax-deferred growth of earnings
and the ability to make "pre-tax"
contributions that can lower your annual
taxable income. And you may be able to
spread your contributions among 10 or
more investment accounts within your
401(k), so you can help diversify your
retirement savings.
Open an IRA. In most
cases, you can contribute to both a
401(k)-type plan and an IRA in the same
year, so, if you don't already have a
traditional or Roth IRA, consider
opening on because it's almost
impossible to save too much for
retirement. A traditional IRA offers
tax-deferred growth of earnings, while
Roth IRA earnings grow tax-free
(provided you are at least 59-1/2 when
you start taking withdrawals, and you
have had your account at least five
years). And you can fund either type of
IRA with virtually any investment you
choose.
By following these basic
suggestions, you will help yourself make
progress toward your financial goals and
you will be doing your part to reverse
those terrible savings statistics.
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