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To
achieve your financial goals, you need
to be a diligent saver and investor. But
you need to do more than just build your
assets. You also must do a good job of
managing your debts. If you let your
debts get out of control, they will
eventually erode your savings and
investments. When that happens, the road
to financial success can get pretty
bumpy.
Unfortunately, your fellow
Americans are doing a poor job of saving
money and staying out of debt. Here are
some telling statistics:
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Debt is rising. By September 2006,
household debt had reached 130.9
percent of disposable income,
according to the Center for American
Progress. In plain English, that
means we owe about a third more than
we have available to spend after we
have paid our taxes and met our
expenses.
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Savings have fallen. For most of
2005 and all of 2006, the personal
savings rate was negative, according
to the U.S. Commerce Department. We
have not had a negative savings rate
since the Great Depression. In
short, we now are spending more than
we save.
These grim figures foretell
a discouraging financial future for many
of us. Every dollar you pay for debt is
a dollar you do not have to invest.
Furthermore, if you have too little in
savings, you may well be forced to dip
into your existing investments to pay
for short-term needs, such as a car
repair or an expensive new appliance.
And, the more you take from your
investments today, the less you will
have available tomorrow to help pay for
retirement or your children's college
tuition.
What can you do to protect
your savings and investments against the
demands of debt? You probably already
are familiar with some steps you can
take to cut costs: Extend the life of
your old car, eat out less often, look
for cheaper phone and cable service,
etc. In short, review your entire
lifestyle, and try to separate the nice
to have items from the must haves. If
you can reduce your expenses, you can
start whittling away at your debt.
While taking steps to cut
your costs, you can still add to your
investments. How? For starters, increase
your contributions to your 401(k) or
other employer-sponsored retirement plan
every time you get a raise. You
generally will not be able to access
this money without taking a big tax hit,
so you will not be tempted to raid your
401(k) to pay off debts. [You can,
however, typically take loans from a
401(k) or similar account.]
You also may want to pay
yourself first. Each month, before you
pay the mortgage, the utility companies
and your other obligations, set aside an
amount for your investments. It will be
easier if you set up a bank
authorization to move the money directly
into the investment you choose. By
having the money taken out this way, you
are less likely to miss it and,
hopefully, you will be less likely to
look at it as a source of funding for
your daily life.
By cutting your debts,
boosting your 401(k) contributions and
paying yourself first, you can help
yourself get a firmer grip on your
financial situation. |
