Savings And Credit

Clients often tell me that they previously thought they didn’t have enough money to work with me and that financial professionals were only for the rich and famous. Because they had only a 401k at work and some IRAs (individual retirement accounts) on the side, they assumed that I wasn’t interested in helping them; nothing could be further from the truth! In actuality, I believe that Americans could benefit from the services that my industry provides.

According to www.bankrate.com, one in four Americans has more credit card debt than savings – one in four! Only 38 percent of Americans have enough savings available to cover unexpected costs of $500 to $1,000.

These are staggering figures, which can be attributed it to our consumer-driven society, but I also think the problem derives from a lack of education and professional support. One of the first places to look is our educational system. We spend a lot of money on teaching our kids about history and mathematics, and some parents take their children to a specified religious center of choice to learn about spirituality. But how much do we teach our kids about balancing a checkbook, the pitfalls of credit card debt or the value of compound interest on your savings? Recently, I noticed a company advertising student loan refinancing, and it bothers me how the serious subject of debt is marketed in a light, jovial way.

In the commercial, people are asked how they got into credit card debt. Smiling, a mother says, “a second kid.” Then, a young girl in her new student uniform, says, “private school.” While having more children and sending them to private school are attractive thoughts and dreams, do we need to go into credit card debt to accomplish those goals? Is it worth mortgaging your future?

Nowadays, most employers offer 401ks or other retirement savings plans at work, but only 44 percent of private-sector workers participate in such plans. If you work at a company that matches your contributions, that is literally free money. Even the IRS is offering tax-deferred growth on that money. Choosing not to participate in these programs is detrimental to your future and contributes to the aforementioned issue: the majority of Americans have more credit card debt than savings.

What is the remedy? First and foremost, pay off consumer debt. If you have a 401k or another defined contribution plan at work, I recommend that you participate in it and max what your employer matches. You can do this while you are paying off consumer debt. If you must choose between paying off debt or saving for retirement or any other expendable income, it is my advice that you pay off debt first. Think about the interest that you are paying on that debt: If you have a 10 percent interest rate on a credit card (which is a good rate on credit cards), and you pay it off completely, you just saved yourself that 10 percent. Now, if you have more than one credit card, you should start paying off the one that has the highest interest rate. While you are paying that, you should make the minimum payment on the others. Once you pay off one card, you can move onto to the next, and so on. If you are starting fresh with this type of approach, first, create a budget, then pay the total amount that you can toward your debt. Next, pay as much as you can on the credit card with the highest interest rate. Lastly, focus the balance of your budgeted amount and pay the minimums on the cards that don’t have the highest rates.

My mother always told me that you should live within your means. If you are not able to afford what you want, you have to save it until you do. My mother was a child of the Great Depression, as many baby boomers are, so she heard firsthand the terrors of financial uncertainty. Luckily, most millennials and children of baby boomers haven’t had to go through such trauma; therefore, most of us are whipping out the credit card for that vanilla latte and not really thinking through the impact that it will have on our future. How could you if you don’t even know how to balance your checkbook?

While the commercials during primetime television may tell you that it’s a good idea to buy that luxury car or to go out to that fancy restaurant, what does your wallet tell you? One of the credit card company’s slogans is “What’s in your wallet?” Personally, I prefer that answer to be “money!”

To contact Jason LaBarge, call 443-837-2531 or email jasonlabarge@premierplanninggroup.com.