Monday, July 17, 2006

Why save before spend?

Americans are in debt. No big news. But how bad is it? For the first time in my life time the average savings rate from Americans is a negative number.

Here is an article about the American savings rate. And here is the chart of interest showing the bank rate over the past 10 years:

So, for the first time in 10 years the negative savings rate, in others words I believe this means that people either got in more debt or ate up some of their savings last year on average instead of saving! If we, as a culture do not reverse this trend you can expect very bad things. Why? Let me expand on my theory..

Debt is funded by the savings of the masses. If the masses save less, there is less funding the debt. So, to encourage saving, interest rates will have to go up. If the savings rate goes up, the debt interest rate will also have to go up. Causing people's credit card and home rates to go up means that less people will be able to spend on other goods and/or go bankrupt which will hurt the economy. The downward spiral will cause a recession until the government has to step in and stop the madness driving the government into larger debt.

Ok...that might be a "the sky is falling" kind of attitude...but its only meant to say that we need to reverse this trend. Its vital to our economy and our future in terms of the younger generation. So check out my last blog and think about transforming your approach to spending your net income.

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