…Why we spend more than we earn
Putting money aside for a rainy day is a thing of the past, but it wasn’t always so. As of April 2007 we officially entered an era of negative savings (-1.4% PA) – yes in our modern day, we actually spend more than we earn!
Back in 1982 the amount of money we each put away every pay check hit an all-time high of 18.5%. And for decades before that generation after generation have been saving an average of 10% – so what happened?
Well you could blame taxes, it’s true that the average tax rate has increased in recent years. If you lived and worked in 1973 you would expect to pay 18.43% of your income in taxes each year. But by 1999 you’d be forking out 23.9% from the same pay check.
Now before you go running out in protest of increased taxes consider your spending habits too. Back in the eighties it was pretty rare to hear of families buying things on consumer credit or taking out loans to buy new cars and take holidays. In fact less than 0.06% of our family income was spent on consumer debt.
Compare that to just 20 years later in 1999 when we were spending in excess of 1.34%. Now some of you may be thinking that’s not as much as taxes! But then there’s our other liabilities such as a few credit cards, car loans and mortgage repayments.
Again we see a huge increase in our spending habits from 1982 where we were spending 0.67% of our yearly income on liabilities to 1999 when it soared past 4.9%. And don’t make the mistake of thinking our spending habits changed in the new millennium, oh no – we kept on spending more and more!
It’s very tempting to get caught up in our fast paced world of constant upgrades and shiny new toys. Media is strongly geared towards making us feel inferior and degrading our self-esteem so we buy more and spend more time working harder to try and pay it off.
Yet it doesn’t matter how hard you work if you’re always spending more than you earn. Instead we need to stop spending and start saving. Having money left over in the bank after every pay check, not only provides security but also starts to work for us so we don’t have to.
Savings can earn a substantial sum of money over time and their earnings compound year after year – so what you earn this year will earn you even more money next year. Debt is always saddled with high interest rates that can quickly eat up your cash reserves.
Minimising your high interest debts not only improves your cash flow but will help you save even more in the future.
Teaching Our Kids
Saving should be something we learn to do from an early age. Trying to change bad habits once we move out of home is near on impossible. It pays huge dividends to teach your kids how to manage their money wisely.
One of the best ways to encourage children to save is to start a “savings-matching program”. Put simply for every dollar your child saves over a certain period of time you’ll match it. So if they save $50 over summer break you’ll add another $50 to their savings.
This teaches children that putting money away and holding back from spending every penny can have great rewards. And if more money doesn’t motivate them, then perhaps a trip to Disney World or the Zoo will.
If you’d like to learn more about teaching your kids to save, then check out Fran Christie’s debut book “101 Money Tips for Kids and Parents” here.