I bet you can tell from the title -- I love this article. It's right up my alley. :-)
It's a letter from Knight Kiplinger of Kiplinger's Magazine (currently second in my tally of best personal finance magazines) to his readers about our need to save more. Here are some of his main points:
My fellow Americans, we've done our nation and the whole world a noble service over the past few years--by overspending and undersaving. With job growth now accelerating, our duty is done. It's time to look out for our long-term interests by curbing consumption and beefing up our investing.
Even in the face of declining U.S. employment and modest pay increases, we kept on buying. As interest rates fell, we channeled our mortgage savings and cashed out home equity into new cars, remodeling and loads of consumer goods, many of them made overseas. And we borrowed freely. Our government egged us on by keeping credit loose, slashing taxes in '01 and '03, and begging us to spend the windfall. This was classic Keynesian medicine, and it worked, sustaining retail sales and helping restore employment to the level of early 2001.
Washington has spent freely, too, on homeland security, domestic programs and the costly deposing of two dangerous regimes. Our budget deficits have soared. Other nations did not stimulate their economies as much, so U.S. exports fell for a while, the trade deficit swelled, and the dollar declined.
U.S. consumers and the government have been the pair of brawny draft horses pulling the wagon of the global economy for the past five years. But now, facing high consumer and government debt, they need to take a breather and let others take the lead. A prime candidate is U.S. business, which is finally hiring and spending more freely on new equipment.
For our part, we Americans need to take a longer view by hiking our personal savings rate from a record-low 1% and telling Washington to rein in its outlays. Yes, this will mean less growth in retail sales and the overall economy. But the long-term benefits will be enormous, as the U.S. reduces both the debt burden on future generations and our dependence on foreign investors to fund our government and the capital needs of American business.
We Americans should be saving at least 10% of our personal income every year, maxing out on our tax-deferred accounts and then some. And we shouldn't rely on the appreciation of our previously purchased investments--for example, home equity and financial assets--as a substitute for fresh savings from current earnings. A higher savings rate, with smart investing of those savings, is the only way to reach the goals we set: a secure retirement, college education for our children and grandchildren, and supporting charities of our choice.
I wish I had written this myself. We have spent, spent, spent over the past several years, and we need to reverse that trend. Let's save, save, save now and get our net worths (and that of our country) back in line a bit.
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