At a lecture I attended years and years ago, Lester Thurow predicted the housing bubble would burst. Though everything around us seemed to be made out of gold, and the economic boom had so much positive momentum that it felt like it would go on forever, he laid out what was coming.
At the time, the average savings of an American household was ZERO DOLLARS. He didn’t say exactly when or exactly how it would happen, but he did make it clear that this complete lack of leverage was going to bite the US in the butt.
And boy did that bite hurt!
DISCLAIMER: I’m not an economist and I haven’t crunched any numbers to support anything I’m saying. Despite this, I’m convinced that adequate savings could have spared many individuals from the wrenching heartaches they had to endure as a result of the housing bubble fallout.
How do people accumulate adequate savings?
I have no idea how to answer this question for people whose incomes are barely (or not) enough to cover even the most basic living expenses. Shacking up with relatives, training for a better job, or proactive family-planning are some possibilities, but they don’t even begin to address the plentitude of issues that propagate these circumstances.
But for most other folks, a few simple tips could provide the reigns needed to steer clear of pocketbook pitfalls that could lead to financial trouble.
Savings Tip #1: Redefine the term “I can afford it”. To too many folks, “I can afford it” simply means the balance in their checking account or, even worse, their credit limit can cover the immediate expense in question. For example, someone who defines “I can afford it” in this (incorrect) way might spend $450 on a purse when there is $500 in their bank account without considering their upcoming car insurance payment.
Shift to the following definition instead:
“I have set aside the funds required to make this expense in such a way that will not impact my other financial commitments, including my monthly savings goals.”
In other words, “I can afford it” means that one will not have to go into debt as a direct or indirect result of the proposed expense.
Stay tuned for Savings Tip #2.