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A savings account can be the best fall back

The recession has sharpened the focus on a number of global economic issues, but one that packs a ground-level punch for consumers who experience a financial emergency is a savings account.

“Savings are always important, but right now they’re extra important because if someone is anticipating a layoff or their income being reduced, they need to have enough to carry them over for that financial storm,” said Dr. Bobbie Shaffett, family resource management specialist with Mississippi State University’s Extension Service.

At the minimum, a good savings account will have enough money in it for a person or household to cover three months’ worth of expenses. Ideally, a savings account will hold six months’ expenses.

That isn’t realistic for a lot of people, Shaffett said, but that shouldn’t mean carrying no savings at all.

Shaffett’s advice? Start small.

“With the economy the way it is, you need to be prepared,” she said. First, start with $500 in the bank as quickly as you can. A savings amount as small as that can offset the most common financial emergencies, ones that require a few hundred dollars, like a blown tire or a refrigerator that needs replacing.

The payday loan business depends on people who experience a minor financial setback and don’t have the savings to cover it. Once wrapped up in the payday loan cycle, it is extremely difficult to get out, Shaffett said.

“The goal is to have $500, $1,000, one month of expenses and then three months of expenses,” Shaffett said. “Then you should be able to weather most financial storms. For this current situation, if there is any way you could have six months (of expenses), then you would be better off. Chances are, within six months you could find some work. You might not find the work you had before, but you could probably find something.”

The consumer culture in America revolves around spending every spare penny a person accumulates, all in an effort to stimulate the economy. Saving money, the culture says, helps nobody.

The culture is wrong, says Glenn Rhyne, chair of the department of business administration and associate professor of economics at Mississippi University for Women.

“The key part of that is consumption,” Rhyne said. “In my mind, it’s more than that, more than just not consuming. You also have to be concerned with the use of those funds. You want to at least get a return, if you possibly can, if you put money aside. That will give you a positive real return.

“The other component of that would be to take it a step further, and that would be to improve your net worth, which involves reducing your liabilities and your debts and at the same time increasing those financial assets.”

While the culture advocates pumping as much of your money into the economy as possible, the benefits are short-lived, Rhyne said. On the other hand, money saved has a good chance of becoming money invested. Instead of a one-time hit to the economy for a product that is used up in most cases immediately, investments lay the groundwork for the future.

“We are the great consumers,” Rhyne said. “We keep the whole world up with our consumption, not only our economy but the global economy. If we reduce our consumption and start to save more, that’s going to have a global impact. But there’s a positive side to that for the U.S. If we reduce our consumption and save more, we know that ultimately this savings – which we normally don’t do as Americans because we have a negative savings rate – gets converted into investments used by businesses to develop technology, improve productivity and spur growth to create jobs and more income over time. Savings has its benefits, while consumption — you buy something and use it up. That doesn’t have a long-term contribution. By saving, not only does a person or household reduce their risk of not meeting their cash outlay (and prepare for financial emergencies), they’re actually helping stimulate the economy in the long run. Every kind of risk is addressed by savings.”

Contact MBJ staff writer Clay Chandler at clay.chandler@msbusiness.com .

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