Getting out of debt is first step to building up savings, finance professor says

Thursday, March 2, 2006

Americans used to be a nation of savers, but a new study from the Federal Reserve shows only four out of 10 people save regularly. An associate professor of finance, insurance, real estate and law at the University of North Texas points to freely available credit and looser rules for home mortgages as major factors in Americans' lack of savings.

"The mortgage lending market has loosened so much it's easier than in the past for a person to have debt problems," says Dr. Randall Guttery, adding that changes in the federal bankruptcy law make it harder for people to leave debts behind.

The new Federal Reserve study shows only 41 percent of Americans save regularly. For the year 2005, Americans' personal savings rate was a negative number, with people spending more than their total income. It's the first time since the Great Depression that personal savings has been a negative number.

"The people who are not saving money are just not getting the message. They are not worried about their future, or they are not making enough income to save and are living from paycheck to paycheck," Guttery says.

Most people should have roughly six months of savings on hand for emergency use, he says.

"However, raw numbers can't determine how much a person should have in his or her emergency savings," he says. "Savings need to be a function of how much a person makes in relation to his or her expenses."

The first step toward setting up a savings plan, he says, is getting out of debt. He says the simplest way to do this is to get a complete look at personal spending.

"Make a budget. Don't just try to wing it mentally," he says. "Write down everything you spend for three months. Most people are absolutely shocked at how much they spend."

Guttery says many people are surprised about how many automatic teller machine withdrawals they make in three months, or the amount they spend on gifts .

Once they're out of debt, Guttery encourages people to save for their retirement through 401K or similar programs through their employer. Since many companies match employee contributions to these programs, the programs are like "getting a 50 percent return on your money," he says.

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