Can Your Savings Hurt the Economy?
Did you know that increasing your savings is detrimental to the economy? Shame on you.
Okay, I'm kidding. But some experts aren't. They are grousing that well-off Americans are now too scared to spend, which is keeping us in a recession, reports Michael S. Rosenwald in "When You're Flush, But Acting Flat Broke" (Apr. 16).
So for this week's color of money question, I'm asking: If you are doing well in this economy, why are you too scared to spend?
Send your comments to firstname.lastname@example.org. In the subject line put "Flushed."
Economy Survival Tip: Education!
Federal Reserve Chairman Ben Bernanke said Americans needed to improve their financial knowledge to better manage their money.
Apparently that goes double for minorities, Bernanke said to students and faculty at the historically black Morehouse College in Atlanta, according to a report by Frank Ahrens in the Economy Watch blog.
During the Q&A portion of his speech, Bernanke was asked about the disparity in wealth between blacks and whites. He responded by agreeing that the difference between white and minority wealth is "very significant." Part of the reason, he said, is that minorities lack financial education.
"There needs to be a broader understanding in minority communities, which haven't had that much exposure, about saving and building a credit record and being part of the mainstream economy," Bernanke told the audience.
I wish Bernanke had gone into more detail about the other historical reasons there's a wealth gap, but at least one reader correctly pointed it out in the comments section of the blog post: "Bernanke needs to do some research so that he can better understand racial income disparity," the person wrote.
Read the comment section of the blog entry. There's an interesting debate about what Bernanke said.
Let's Make a Deal
Freebies and online giveaways are the silver lining of this economic cloud. People are making great use of coupons, searching the Internet for deals and taking advantage of restaurants and shops that offer free perks to lure customers.
Getting something for free can make people feel financially savvy. For example, mother of three, Jill Berry has "won T-shirts, cleaning products, a small portable vacuum, olive oil, beef jerky and -- best of all -- a Nintendo DS" by entering various online sweepstakes writes Post reporter Nancy Trejos.
And, companies are starting to notice. "For instance, in February, all McDonald's in the Washington area gave away medium-sized hot or iced coffee from 5 a.m. to 9 a.m. -- with no purchase necessary" reports Trejos.
Read more in A Golden Age for Cheapskates (Apr. 19).
Leftover Chat Q&As
Last week's discussion topic was teaching kids about money. Author Susan Beacham answered questions about her series "The Millionaire Kids Club," which shows kids how to invest, save, spend and give back. Here are a few leftover questions from the chat that I'm answering this week:
Q: My three kids are now in their 20's and each opened a checking account with debit when they turned 13. It was the best experience for them, and they also learned how to use their debit card wisely. No allowances ever, but we did provide them with a monthly clothing allowance. Do you think that they really need to get a credit card? I honestly do not, but some people think I am wrong, saying it will be helpful for their future credit score.
A: Stop listening to other people. Their kids are probably broke. You are doing the right thing advising your children to stay away from credit cards as long as they can. There are other ways to build a good credit history.
If they have car loans and are making the payments on time that helps them build up a credit history and good credit scores. If they have student loans, that's building a credit history. If they have cell phones and the companies are reporting their payments history to the credit bureaus that's building a credit history.
They may well find they need to get credit cards for the ease of renting a car or booking a hotel room but until they do, you've taught them the importance of using cash and that puts them so far ahead of their peers. Good for you! (Also have your young adults read the next question.)
Q: Our family debt is, embarrassingly, in the six-figure range (including auto and student loans, as well as some credit cards). Despite some cards jumping to a 30 percent interest rate (despite a good payment history - this is due to the overall debt load), I am committed to paying these off. Begging and pleading with creditors has not worked to lower the interest rates (with even slightly lower rates, we would be able to make great progress on the debt). However, even if they will not lower the rates, I am committed to paying off the debts in full because it is the right thing to do.
I am very fortunate that my employer is offering unlimited overtime -- a very rare occurrence in today's economy. I'm working 60 to 70 hours a week -- really, as much as I can manage in order to keep up with the debt (All that is just to make minimum payments with the ridiculous interest rates). Should I try to work even more, which I think would definitely affect my health. I'm already exhausted, although perhaps getting myself into this debt mess means I lose my right to complain about such things)? Keep trying to negotiate?
A: I'll answer the last question first. Yes, keep trying to negotiate -- nothing ventured, nothing gained. But don't worry yourself sick making those calls. Continue to make extra payments and on time and then go back every so often to see if your history of payments will persuade your creditors to lower the interest rates.
You might also think about transferring the balances of the higher rate cards to a card or cards with lower rates. Now, doing so may lower your credit scores, but at this point your main goal is to get out of debt. Temporarily take the hit to pay down the debt. Once you've done that AND you continue to pay on time, your scores will go back up.
Now as for working yourself into a grave, I'd nix that. Look, I'm one of the biggest advocates for aggressively getting out of debt. But if you die trying, well you'll end up dead and the debts still don't get paid.
Of course I'm being facetious but I hope you get what I'm saying. This isn't worth sacrificing your health.
Go back to your budget and make sure you've cut every possible expense. If you couple that with the extra hours you are already working, you will get out of this mess. It will take longer than you like, but then you probably didn't get into debt overnight, right?
If at some point the debt is just overwhelming, try getting help with cutting those interest rates by going to www.debtadvice.org, which is run by the National Foundation for Credit Counseling. The NFCC recently struck a deal with the nation's top 10 credit card issuers to roll out two special debt repayment plans. Part of the feature of these plans is cutting fees and interest rates on people's credit cards. For more details of the plans read my recent column: As Recession Deepens, Even Credit Cards' Minimums Can Become a Burden."
Q: What do you think about Suze Orman's suggestion to save and pay the minimum payment on credit card debt? Should we build an emergency fund before paying off credit card debt?
A: I think the point Orman was trying to make is you have to have some money saved even while paying down debt. It's great that people are trying to dig themselves out of debt. But if you dump all your savings or extra money into paying down your debt, what happens if an unplanned expense comes up? Well, you go further into debt. So yes, I agree with her that until you have a little bit of a savings cushion just make the minimum payments on your credit card debt. Once your have some money saved, then you can increase your credit card payments. And hopefully if you are not paying off your card every month you aren't also still using the card.
Check out these stories for more debt tips:
* Debtors' -- and Collectors' - Obligations (Color of Money, April 12)
* For Debt Help, Do Your Research (April 26) by Kiplinger's Laura Cohn
If you have more questions, join me next week for a free-for-all discussion about personal finances on Thursday, at Noon ET.
You are welcome to e-mail comments and questions to email@example.com. Please include your name and hometown; your comments may be used in a future column or newsletter unless otherwise requested. Charity Brown contributed to this e-letter.