I had planned to address the fallacy (yes, I spelled it wrong last week) of inflation and the silent theft of your savings by the Fed this week, but a discussion I had at lunch yesterday presented an issue that I find more pressing and a sort of precursor to the inflation discussion. So I’ll push off the inflation discussion for another week.
Yesterday, I had lunch with two coworkers that I respect and admire. The topic of discussion was investing, as it often is with me. Eventually we started to discuss who in society should be investing. My belief is that everyone should be saving and investing.
(As a side note, this does not mean that I think the government should make a law to force saving or investing. There are very few situations where I think government regulation is needed and to be honest I cannot think of any right now. People should be allowed to make and learn from their own mistakes.)
The contrary belief was then voiced that some people could not afford to save or invest. This was followed up with an anecdotal example of some specific people not being able to buy groceries when their paychecks were temporarily interrupted and arrived a week late.
Who’s Fault Is It?
I know this makes me sound like a jerk to the majority of the public, but if a person cannot pay for groceries after a week’s interruption in income, then in my opinion that is that person’s fault alone. That is not the fault of anyone outside that person. That is the fault of the person for not saving and creating a cushion that they can fall back on when times are not as fat as they are on that day.
But if these people can’t even buy groceries after a week’s interruption in income, then they just do not have any extra money to save, right? In my opinion, this is the same as saying that it is okay for a person to steal something just because they want it. It is an excuse. In fact, I would venture to say that by not saving, a person is in fact stealing from their future self. History is pretty consistent in showing that times will not always be as good as they are at any given point. So if a person is not saving, then eventually history will repeat and that person will not be able to sustain their standard of living.
So now the question becomes how can that person save if they have no room in the budget to do so? Well, in my opinion, the assumptions of the problem are false. The person can save. How do I know it? I have the spreadsheet to prove it. I don’t agree with a minimum wage, but it makes this particular discussion a bit easier because I can start with that as the smallest amount of income that a person can have.
Running the Numbers
The minimum wage right now is $5.15 per hour. So at 40 hours per week, and 50 weeks a year (2 weeks given for sick leave or vacation), a person can bring in a gross income of $10,300. Last year, the personal deduction was $5,150, which leaves them with $5,150 in taxable income. The tax rate last year on that much income is 10%, so they would at the most owe $515 in income taxes. But they also owe FICA on the full amount at 7.5%, which is another $772.50 in taxes. So total out of their earned $10,300, this person has $9,012.50 to spend.
In my area, a room can be rented for $275. This would be a room in a 3 bedroom house with 2 other roommates, but it would be a private room. It also includes a washer and dryer. Then utilities of electricity, water, and trash would cost about $32. Food and groceries for one person per month can easily be kept at $125. I’ll give a $50 allowance for transportation, but I think that is high, as I see people walking to work at Wal-Mart on a daily basis. These are all of the normal monthly expenses that a person needs to survive and maintain employment. The sum total comes to $482 per month, which is $5,784 per year.
So this person has $9,012.50 in income and $5,784 in expenses, so they should be able to save $3,228.50 after tax. So they could save more than 30% of their gross income per year. You might also note that in one year they saved more than 6 months of expenses. So now if this person lost their job or got sick or hurt so they couldn’t work, or even had a temporary interruption in their income, then they have the money to sustain themselves until they get over that hump.
The argument at this point generally becomes, that an existence on $5,784 per year is not living. I beg to differ. What you are really saying is that you don’t want to give up such and such creature comfort. But in reality one can entertain oneself in many ways. Parks are free. The library is free (and it has books, DVDs, tapes, and computers for internet use). And friends are free. And I hesitate to say it, but local TV is free (if you don’t count the rotting it causes in your brain or the loss of time that you could be spending investing in your knowledge).
Yes, there are other more expensive interests to pursue, but until a person can afford those pursuits in both fat and lean times, my opinion is that person should abstain. One of the hardest things to do is to lower one’s standard of living, so the logical conclusion is that one should not prematurely raise one’s standard of living until one is certain that the new standard can be maintained.
Investing Is Also Necessary
Although I am planning to show that inflation is a fallacy and actually theft by the Fed in a later post, we still have to deal with it because it has a real detrimental effect on our savings. So even though one is now saving, one cannot just save. One has to invest to maintain and improve their level of savings to stay ahead of inflation.
Of course a further benefit of investing is that eventually your investments could replace your current income and even allow you to increase your standard of living.
It is important to note that without savings one can’t invest at all. Investing, simply put, is expending something of value now with the hope of creating more value later. It is the “hope” part of that statement that requires savings for investing because hope implies uncertainty. Thus, there is the possibility that one will not receive back all of the investment. And if one absolutely needs that money for survival, then one can’t risk losing it on an investment, therefore one can’t invest.
So to put it simply, everyone should be saving and investing. If they are not, then they are living beyond a maintainable standard of living. They will have no cushion when something bad comes along and only themselves to blame.
But if they do hit hard times, we as a society should not bail them out. It will only encourage them to do it again, and not teach them the lesson that they should be learning about the importance of saving. We’re about to do it with the sub-prime mortgages, but these are the epitome of people that are living beyond a maintainable standard of living, and they definitely need to learn this lesson.
If you disagree with the opinions in this article, write in or leave a comment to let us know why. We’d also be curious to know how many of our users out there are regularly saving 30% of their income since we have shown that even the lowest paid workers can do it.