Friday, November 6, 2009

Having A Savings Account..

Right now is a terrible time for living off your interest money earned from a savings account. But there are many elderly (and not so elderly) doing that right now. When interest rates were around 6% on a CD (certificate of deposit), a person with a life savings of $200,000 could expect to receive $12,000 a year, or $1000 a month. (taxable income) After the catastrophe of the recession (or whatever it was), interest rates on CD's are around 2%. So the same amount of money would earn only $4,000 a year, or $333 a month. This amounts to a 66% pay cut.

This fact is not talked about in the media today. There are millions of people living off of way less money than they were used to. These people do not have a "category" easily tracked by graphs and statistics. They are lost as a casualty of today's events. This also hurts the Federal Government considerably. Interest income is taxable. So the IRS is getting 66% less money from taxable income. In many cases, it amounts to even more than that because the loss of income for the recipient. This may push them into a lower tax bracket and they will pay even less tax.

That being said, saving in a bank account is a good habit long lost. Today's economy thrives (or at least used to) on credit purchases. I remember when I was little and got paid $5 to cut the grass, my dad would make me walk up to the bank and deposit half in my savings in a savings account. He would inspect the bankbook when I got home. At the end of the year, he would sit down with me and show me the benefits of interest earned. $100 became $110, add a little more and $150 becomes $170. That is great incentive for a 10 year old.

When I was a bit older, he also explained the shortcomings of negative interest. Negative interest is the interest YOU pay out on credit cards and loans. A 17% interest credit card is like a savings account in reverse. Not only are you NOT earning money with your money, you are losing money at a ridiculous rate just for the convenience of being able to make payments. Paying 17% and not earning 3% adds up to 20% more money that you should have. I know that is a crude example, but you get my point.

I do not object to a credit card purchase as long as you pay off the entire balance every month! As a matter of fact you can actually make a little money by doing just that. As long as you pay off the entire balance at the end of the month, you have kept that money in your account until they actually cash the check.

My dad's theory was simple; if you cannot afford to pay cash for something, you cannot afford it. Period. He did not object to buying on credit, but it was a good check and balance of where you stood. By following this advice, I developed a habit that carries on 40 years later - put a little money in the bank whenever you can. And leave it alone!

Maybe it is because kids today can't fathom the mathematics, but I don't think we need to discourage young people from saving...

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