What about Saving?

Saving money is normally a good idea. Besides "under the mattress", there are many places one can store money for a rainy day: checking, savings, and money market accounts, CDs, savings bonds, and many others.

But before you decide how much to save, you should look at your current debt load. While saving is an important habit to form, it can be done foolishly. Earning 3% on a savings account while paying 7% on a car loan or 22% on a credit card is not a smart move. It takes some thought to figure out a good balance. The important thing to keep in mind: ignore interest at your peril. It adds up, and siphons off thousands of dollars a year from your budget. Your goal should be to minimize that amount as much as possible.

Even if you have some debt, a couple thousand dollars socked away for emergencies would be prudent. No one wants to lose their house, and credit cards charge more for cash advances than for regular store purchases. But remember that any debt you have is subtracted from your Net Worth, just as any savings add to it.

Paying off debts is as good as saving—it places you in a better financial position, and increases your Net Worth. And as you pay off your debts, you have more and more of your income to save (or spend, for that matter).

Credit Cards

Americans are notoriously deep in debt—and not just for their home and car. The average adult carries a balance of thousands of dollars on any number of retail and bank credit cards. Personal loans—including home equity, debt consolidation, and student loans—also contribute to this debt load. What is important about this, is that all of these sources of debt contribute to the draining of a family's budget.

A monthly budget is a snapshot of how a family is doing. If the income is greater than the expenses, the family is doing well financially because they have money left over—which can be saved for future needs. This is called a net surplus. But if the monthly expenses are greater than the monthly income, the family is doing poorly, because it is sinking deeper into debt with every passing month. This is called running a deficit.

If there were one single law of "how to not be a debt slave" it would be: avoid debt at all costs.

Even going into debt for necessary things (house, car) can be done wisely. Choose a house that you can live in for a while, but do not buy as much house as the realtor says you can afford. The realtor is paid a 3 to 6% commission on the house you buy. Take a calculator and see which house will bring a greater commission: an $80,000 house, a $150,000 house, or a $200,000 house. This should put you on your guard as to what the realtor is going to be pushing for. (Hint: the more expensive house, always.) Tell him how much you are comfortable spending, and he will be forced to oblige you. If you do not intend to go over your head, the realtor cannot force you.