Start Saving Now -- But Not in Dollars

In the past few years, the United States has crossed over from a positive to a negative savings rate. That is, U.S. residents on average have begun spending more money than they earn, eating away the savings they once had or, worse, building up more and more debt, rather than setting money aside for the future. The last time this happened was during the Great Depression, when people had to tap into their savings or go into debt merely to survive. For most U.S. residents today, spending more than they earn is not a matter of survival but a matter of lifestyle and bad habits, brought about by decades of artificially propped-up markets -- first the stock market and then the real estate market. Runaway gains in stock and real estate prices made setting money aside seem like a waste of time and effort since appreciating values of investment and ever-rising home equity could be counted on to provide future wealth. Why put $20 a week into a savings or investment account and wind up with just over $1,000 a year later if, during that same year, you expect your house to gain $100,000 or more in value? That kind of thinking has gotten millions of U.S. residents into what will be deep trouble when they discover that neither their homes nor their stock market portfolios have gained as much real value as they expected, as costs for daily necessities have risen much faster than they thought possible. One of my most disheartening predictions is that a substantial number of U.S. citizens who are currently retired will find themselves forced to return to the work force, as their pensions, Social Security, and savings prove inadequate to live on. Don’t let this happen to you. Instead, try some of these savings tactics: * Take advantage of automatic deductions. Most banks now offer some form of automatic deduction plan that allows you to transfer a small sum of money to a savings account on a weekly or monthly basis. Use plans like these to painlessly set aside money that will be there later on when you need it. But once it’s in your savings account, do not leave it there! Your hard-earned savings will lose value as inflation rises and the dollar declines. Instead, use the advice in this Little Book and invest that money in foreign countries, in silver or gold, or in commodities, all of which are likely to appreciate, even as the U.S. economy takes a beating. * Look for small ways to build savings. Look around your home. If you're like most U.S. residents, it’s full of items that you bought but don't use. Today's world offers more opportunities to turn unused items into cash than ever before. Clothing can be gathered up and brought to a consignment shop (have things clean and pressed, and on hangers, to get the best prices). Other unused goods can be sold at a garage sale or at an online marketplace such as eBay. Books you no longer need can go to used book stores, or you can sell them directly to other readers through craigslist and other web sites. And don't forget to empty your pocket change daily into a jar, bowl, or piggy bank. You'll be surprised how quickly that can add up to big money. * Don't spend that raise or bonus! Next time you get a compensation increase, don't spend it, or at least not all of it. If you were able to meet your expenses at your previous salary, you should be able to set aside at least some portion of the increase and add it to your savings. Use automatic deductions to move some of your new paycheck into your savings account -- but again, don't leave it there! * Look for simple ways to cut costs. There's been a lot of discussion in the press and in personal finance books as to how buying a simple cup of coffee rather than a fancy Italian concoction -- or better yet, making your own coffee -- can add up to big savings over time. But coffee isn't the only case where small adjustments can snowball into real savings. Reexamine your long-distance charges, your cell phone plan, your cable or satellite TV plans. (Internet video services may offer a wider range of choices at a much lower cost.) Find out if bundling video, phone, and Internet service could reduce your monthly bills. Keep savings in mind when you shop for large items like televisions or computers -- and consider buying these and other items secondhand instead of brand-new. As the economy worsens, I predict more people will be forced to sell their valuable purchases just to stay afloat, which should create some opportunities to get real bargains. Put the money you save over buying the item new into a dollar-proof investment, and watch it grow. Get Rid of Debt -- Especially Variable-Rate Debt Imagine you are standing in an appliance store, trying to decide whether to buy a new stereo system. The clerk explains: "I can't tell you exactly how much you will wind up paying for this system, but I know it will definitely be more than the price on the price tag." Reducing or eliminating credit card debt should be one of your top priorities as you prepare for the coming economic downturn. Would you go ahead and buy it? You may not think so. But that's exactly what you are doing every time you charge a purchase to a credit card, unless you're among the minority of U.S. citizens who pay their balances in full every month. Reducing or eliminating credit card debt should be one of your top priorities as you prepare for the coming economic downturn. This means working to aggressively pay down balances, and resisting the temptation to open new credit card (or retail store) accounts that will soon build new balances of their own. Don't roll debt over from one credit card to another to capture a low introductory rate. And don't get sucked into the common trap of using a home equity loan or line of credit to pay off credit cards. The lower interest rate may make this seem like a good idea, but unless you destroy your credit cards at the same time, the end result will likely be even more debt than you had before. Truly taming credit card debt requires a mental adjustment similar to the one I've prescribed for the United States as a whole. We need to return to a mind-set of saving up to buy the things we want, rather than charging them now and figuring out how to pay for them later. Adopting that new mind-set will carry real economic benefits. Let’s say you save up to buy a new $500 sofa. Because your money will earn interest while you’re saving it, and that interest will compound over time, you may wind up actually spending only $450 by the time the sofa arrives in your home. If you charge it to a credit card, you'll have the sofa sooner, but at a much higher cost, perhaps as high as $ 800 once interest (and late charges, if you ever miss a payment) is taken into account. The time to make that adjustment is now. I predict, as the economy worsens, credit card companies will start charging interest rates that make today's 25 percent seem cheap, or more likely just refuse to lend altogether. We need to return to a mind-set of saving up to buy the things we want, rather than charging them now and figuring out how to pay for them later. Credit cards may not be the only variable-rate loans in your life. If you have an adjustable rate mortgage, home equity loan, student loan, or any other variable-rate debt, the time to do something about it is now, while you still can. In the next few months or year, the weakening dollar, combined with growing foreign purchasing power, will force inflation up, and interest rates up with it. I recommend refinancing mortgages and home equity loans at a fixed rate as soon as you can. Student loans are more difficult, but there are companies whose business is built on consolidating student loans and providing a nonadjustable rate. As a general rule, it's a bad idea to borrow for daily necessities such as clothing or food, or for luxuries such as a vacation. But it may be a good idea to borrow for something that will allow you to increase your income, such as a professional course or conference, or a car (but not a luxury car) that will allow you to get back and forth to your workplace. By this same logic, I do recommend borrowing against the equity in your home if you can meet the following two conditions: 1. The rate of interest is low enough so that you can invest the money and get a higher rate of return. 2. That return is paid on a regular basis, so that you can use those dividends or other funds to make the payments on the loan. Since you're paying your loan in dollars, if you invest abroad and the dollar continues to fall, that difference will grow into quite a tidy sum that you collect on a monthly or quarterly basis. You can pocket that difference -- or better yet, add it to your savings. If, as I predict, the real estate market continues its decline, you might not be able to find a buyer for your home -- so borrowing may be the only way to get any value out of it. Stockpile Goods If a box of corn flakes costs $3 today and $4 a year from now, then buying those corn flakes a year early provides a 33.3 percent return on investment. That compares favorably to even the most aggressive stock portfolio. So, storage space permitting, it makes sense to buy ahead and in bulk quantities anything from canned soup to laundry detergent to motor oil that you know you will need in future years, when prices are almost certain to be much higher. (Please always check expiration dates and storage recommendations for temperature and so forth, of any item you plan to stockpile.) It might even make sense to stockpile some items you yourself don't use. For instance, wine, liquor, cigarettes, and cigars don't lose quality over time, if you can provide them with an appropriate environment, and might even improve as they mature. As prices skyrocket and Asian consumers begin buying more luxury goods, products such as these can become very valuable barter items -- worth much, much more than the price you pay for them today. A carton of cigarettes that costs $15 in today’s market might be worth $30 a couple of years from now. Now that's a return on investment! It might also be a good idea to buy a handgun and lots of extra ammunition to protect your supply. Let's hope that you never have to use it, but given the potential for civil unrest, it's always better to be prepared. Besides, even if never used, my guess is that prices of both guns and ammunition will rise sharply, particularly if the government limits their future availability through legislation. Just think about it as another investment. I'm bullish on metal, and there is plenty of lead in bullets. Get Good at Fixing Things We live in an economy where if something breaks, it is usually less expensive to throw it away and buy a new one than it is to have it repaired or to try to repair it ourselves. (It's sometimes actually less expensive to buy a whole new computer printer than to replace an empty cartridge in the one you already have.) This situation came about in part because China has kept the value of the yuan against the dollar artificially low. As the dollar continues to drop, and China continues its policy of gradually loosening constraints on the yuan, artificially low prices will rise and U.S. residents will be forced to economize. That means it will no longer make sense to toss that radio that’s stopped working, or buy a new dress for every social occasion. Knowing how to fix small appliances, sew clothes, grow vegetables, and engage in other lost domestic arts of our grandparents' generation will stand you in good stead in the coming decade. They lived comfortably with fewer purchases, and had the satisfaction of being much more self-sufficient than we are today. Learning how to do the same will not only save you a bundle on discarded products that are no longer inexpensive to replace, but you'll find yourself with marketable skills. Neighbors who need their clothes mended or the fuse replaced in their electric appliances will happily pay you in cash or in barter for your trouble. That will provide extra money to add to your savings -- or cover growing expenses as prices continue their climb. The next 10 years will be difficult, but the coming economic adjustments will bring some real benefits. With U.S. consumers spending less, our trade imbalance will improve. I hope our government will respond to the crisis by finally instituting the kinds of measures and controls needed to make the dollar a safe and strong currency once again. And absurdly high prices for big-ticket items made possible by easy credit may return to reality in an environment where having a pulse is no longer enough to qualify for a loan. This means real estate will become more affordable. As real estate prices collapse, the prospect of meaningful home ownership will again be within the reach of average U.S. residents. Provided they have the discipline and the wherewithal to actually save a 20 percent down payment, they will be able to buy a house without simultaneously mortgaging their futures. Despite higher interest rates, bigger down payments and lower balances will mean housing will take a smaller chunk out of the typical homeowner's paycheck. And with much lower real estate prices and higher interest rates on savings, the 20 percent down payment will be much easier to save! The rate of ever-increasing college tuitions, which are currently inflated to unrealistic heights because widely available long-term student loans make it easier to go to college will also slow down, though students will wind up spending much of their working lives paying back those loans. Thirty or 40 years ago, young people could attend college without taking out a loan, as my father did, by working a part-time job and saving up from a summer job. Today, without rich parents or full scholarships, graduating from college debt-free is close to impossible. In the short run, the coming credit crunch will mean fewer people attending college -- an unnecessary expense in many professions -- and heading straight into the workforce instead. But as loans dry up and enrollments decline, colleges will be forced to find ways to economize, and bring tuitions back to affordable levels. That will mean a new generation of college graduates will be able to start their careers without already facing decades of debt. The above is an excerpt from the book The Little Book of Bull Moves in Bear Markets by Peter D. Schiff Published by John Wiley & Sons; October 2008;$19.95US/$21.95CAN; 978-0470383780 Copyright © 2008 Peter Schiff Author Bio Peter D. Schiff is President of Euro Pacific Capital, Inc., and one of the few unbiased investment advisors to have predicted the current bear market and positioned his clients accordingly. Schiff appears frequently on Fox News, Fox Business News, CNN, CNBC, and Bloomberg TV, and has been quoted in such publications as the Wall Street Journal, Barron's, the Financial Times, and the New York Times. He is also the author of Crash Proof, which is published by Wiley. For more information, please visit http://www.europac.net/