Savings plan needs balance and strategy
Dear Dave: My husband and I are trying to work on a budget and we’re coming at it from different perspectives. He wants to put the least amount possible into the budget categories and the rest into savings. I want us to save, invest and do some other things, but now we’re not doing anything but saving. We have no debt, $100,000 in savings and we make about $200,000 a year. I’d just like to use some of the money to buy a new couch. — Mary
Dear Mary: Well, it’s obvious he’s highly motivated by the word “savings.” This isn’t necessarily a bad thing, but there’s got to be a balance and a strategy involved.
Savings is a very important part of any healthy financial plan. But honestly, I think it’s unwise to have savings just for the sake of having savings. You need very specific goals in mind — a mission statement — like a fully-funded emergency fund. Three to six months of expenses is a very tangible goal. You can work toward it and know when you have it in place. That way, when life happens — and you know it will — it doesn’t turn into new debt and added stress.
You can do this with other things, too. Christmas and birthday presents are great examples, along with particular debts or items you’d just like to have once in a while — like that new couch.
Tell him that and let him know your financial counselor agrees with you, because I do! I think you need to be saving money, but you need to be saving it with a specific goal in mind, and you both need to be in agreement on where the money’s going.
Otherwise, you’ll turn into Howard Hughes; sitting there unhappy with big piles of money and no mental health! — Dave
Dear Dave: My brother-in-law is giving me a hard time about my credit card. It has no annual fee, and I get money back from the credit card company for all of my charges. I only use it for bills and pay it off every month, but he tells me there’s no justification for having a credit card. In this scenario, I’m getting paid back by the credit card company for using their credit card to pay my bills. So where am I wrong? — Chris
Dear Chris: There is absolutely no justification for using a credit card. Why don’t you just pay your bills with a debit card, and draw the money directly out of your bank account? That’s better than borrowing it and paying interest on the blasted thing.
Where you’re wrong is a good question, though. I’ve been doing financial counseling for years and worked with tens of thousands of people. During that time, I’ve repeatedly met folks who were doing exactly what you are and it has come back to bite them.
When you’re talking about credit cards you’re talking about a multi-billion dollar industry designed to do just one thing — separate you from your money. And they’re very good at it! They’re more than willing to pay you a percentage point back because they know you’re going to stumble at some point — and that’s when they pounce!
I’ve talked with hundreds of millionaires, and I’ve never met one who said credit cards were a blessing or that they got rich thanks to credit card rebates.
They’ve all just gone about the business of earning money, living on less than they make and saving. They don’t play with snakes because they know sooner or later they’ll get bitten.
This is a dangerous game you’re involved in, Chris. I challenge you to stop playing it, and model yourself after wealthy people! — Dave