By Bill Taylor
It seems to me that the world of personal finance has been turned topsy-turvy, upside down, inside out from the way we seasoned citizens were brought up to understand money matters. The principles, procedures, and, practicalities of moneymanagement were an integral part of our education, our lives, from our earliest formative years – but that has all changed dramatically.
When we were in grade school we learned that saving money was a good thing. To that end we had School Savings Accounts with a local bank. We were issued our own personal bank book and every Friday during the school year we could bring money to school to deposit in our accounts with each deposit and the balance clearly entered in our bank books.
The amount was usually small – just a few pennies or maybe a nickel or so – but the concept of regular saving being the thing to do became ingrained in our behavior patterns. I can still recall how proud I was to go to the bank with my very own bank book to make a withdrawal to pay for something I had saved for with my School Saving account.
During WWII (or as we old-timers say “the” war) the government issued War Bonds to help finance the hostilities. The smallest denomination for a bond was $25 which cost $18.75 redeemable for face value after ten years. One slogan was “Four dollars for every three” which touted the interest rate of 3.33 per cent over the 10 year life of the bond. We youngsters didn’t have that kind of money but there was an alternative. We could buy War Bond Stamps for a quarter each, paste them in a special stamp book, and when we had filled in all the spaces we could turn the book in and get a $25 bond. Yep, saving was a way of life we learned early.
Saving was a key requirement for anyone wanting to buy a car or a home. Back then a substantial down payment was needed – I can recall how a new car loan required one-third down. Buying a home also required forking over a hefty chunk of change to obtain a mortgage – and so folks saved, often for a number of years, to accumulate enough cash to realize the family dream – a home of their own. But the family home provided not only shelter, it provided an investment for the future as both the value of the home and the equity in the home continued to increase. In fact, the family home became the largest financial asset for most families and increased a family’s net worth.
Ok, so how did we save money? One way was to make regular deposits in a savings account in a bank and relying on “compound interest” to help increase our savings. (Compound interest is interest calculated on the initial principal and also on the accumulated interest already paid.) Another way was to purchase government savings bonds ( the successors to war bonds.). I once redeemed a bunch of savings bonds I had accumulated by an automatic payroll deduction plan and used that money as a down payment for a new car. Yep, we knew the drill.
What has changed with this scene? Well, for one thing deposits with banks or credit unions, whether in a regular savings account, a Certificate of Deposit (CD), or money market fund, now generally pay less than one percent interest. Thus the interest on a thousand dollars in savings is less than a dollar a year – hardly a robust return.
Compounding this problem is the rate of inflation of somewhere around 2-3 percent so money deposited as savings actually loses value. And as for government bonds, recent sales of ten year bonds showed a yield of less than one percent – a far cry from some savings bonds we still hold that pay about six percent.
The family home, once the largest family financial asset, has turned into a huge family financial liability as many mortgages are “under water” meaning the amount owed is larger than the value of the home. In addition, most families have found their most valuable asset has declined in value. (The value of our paid-for home has decreased about by about 25 percent since we bought it thus decreasing our family net worth.) Whoda thunk it?
Contrary to the concept we were taught there is little incentive to save these days. After all, auto loans no longer require the substantial down payment we were used to and I understand neither do many home loans. Furthermore, savings are subject to what amounts to “negative” interest, that is, the value of savings actually decreases over time.
Yep, the world of personal finance has truly been turned topsy-turvy, upside down, inside out from the way we seasoned citizens were brought up to understand money matters – and I’m not sure it’s better. At least that’s how it s seems to me.