Truths & Myths About Saving

*Correction Apended 2/18/09: An earlier version of this post incorrectly identified Ric Edelman as a CFP. We regret the error.*

For far too long, we as a nation neglected to save for a rainy day. But as Carmen put it on tonight’s show, it’s no longer raining – it’s pouring – and our attitudes are changing.

Back in the 1980s, Americans saved 8% to 12% of their income. By 2005, our savings rate actually turned negative. As the current economic crisis deepens, some old savings habits are making a comeback. In December, the savings rate “skyrocketed” to 3.6%, a 30% increase over the previous month. Of course, with more of a focus on saving for the long term it’s as important as ever to make sure we’re making the most of our money while still keeping it safe.

And what better way to illustrate that point than with today’s breaking story that the SEC has charged a Texas firm with ‘massive fraud’ related to high-yielding CDs. This alleged scam differs from the typical Wall St. ploy of late in that it’s actually a savings scheme, says financial advisor Ric Edelman – and it affects Main St. directly. The firm, Stanford Financial Group, misrepresented the safety and liquidity of billions worth of uninsured CDs, according to the complaint filed by the SEC. It is a prescient example of the dangers of chasing yield in guaranteed investment accounts, Edelman says. If you’re seeing double-digit gains in CDs when basic CD rates are below 3%, it’s obvious that something fraudulent is at play. The easiest way to guarantee a level of safety in your savings is, of course, to stick with U.S. treasuries. While the yields can be next to nothing, consider it the price you pay for the ultimate safety net.

There are some that argue that the higher savings rate we’re seeing is actually doing more to harm the economy. After all, consumer spending makes up over two-thirds of our GDP and the more we each cut back means less that’s going directly back into the system in terms of buying goods and services. But Carmen and Edelman would like to put an end to that notion – call it the paradox of thrift – right now. Our personal economies are most important, they say, and a greater national savings rate will do more to sustain an economic recovery in the long term. Savings can also fuel the economy indirectly as more investments mean more money flowing through the capital markets.

Carmen put it this way: if we each do what we need for ourselves first, we’ll dig out of this hole the right way. If it takes longer, so be it. The savings lessons we learn in the long run and pass onto our children will be worth it.

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