by Paul Petillo
American Reporter Correspondent
February 15, 2005
HOW SAVINGS CAN CHANGE AMERICA
PORTLAND -- The late Ernst Mayr once said: "Every politician, clergyman, educator, or physician, in short, anyone dealing with human individuals, is bound to make grave mistakes if he ignores these two great truths of population zoology: (1) no two individuals are alike, and (2) both environment and genetic endowment make a contribution to nearly every trait."
Often referred to as the world's greatest evolutionary biologist, Mr. Mayr believed in the influence of geography on the evolutionary outcome a species.
This type of chasm has developed between Washington and Wall Street and the rest of America. The policies that have been set in motion will dramatically change the outcome for the species who lives, works, and plays outside of those vaunted halls of finance and politics. We have become an evolutionary experiment with vast financial repercussions.
In order for future generations to be in a better economic place, the fiscal responsibility does not fall on the shoulders of these "Intelligent Designers" but on the backs of labor.
An economic revolution needs to take place but it should not come from the leadership directing these dramatic changes in retirement, Medicare and Medicaid. It needs to begin with us.
Three things need to be done to enable this shift from sentient acceptance to active participation in our future.
First and foremost, we need to address our savings habits. If this nation changed from a population of spenders to savers, the dramatic shift in our economy would result in an economic ripple effect that would be felt world-wide.
We are a nation of non-savers, putting away a mere 0.2% of our incomes for a ³rainy day² according to the Commerce Departmentıs latest numbers. How did spending become so embedded in the psyche of the American people when once we were quite the opposite?
This nation needs to stop its downward descent from solvency to bankruptcy. This can only come about with a fiscal call-to-arms, a personal mandate to stop spending, to cease borrowing to spend, and to come to an understanding that consumerism has become global with money flowing outward and not into the paychecks of other American workers. Our continual and ever-increasing spending does not benefit this nation.
Secondly, tax reform needs to begin at home. The crusade to get folks to change how they view their tax refund is truly one of Sisyphusian proportions. It is, however, the next best place to begin to understand savings.
According to the IRS, for the tax year of 2003, the average refund was around $850. While many people feel as though this refund is justified, it should not be considered savings. Think about it. Is it really considered money saved if Uncle Sam has taken too much from your paycheck, held on to it for the full year, eventually refunding it to you - and in many instances, delivered quickly by your tax preparer for a slight surcharge? These folks belong to the group that Mr. Bush suggests deserves the right to direct the ownership of their future? Their ability to do this, if judged by the amount of their tax refunds, should be cause for great concern in Washington.
Saving requires pain.
Suppose those looking for that tax refund did something dramatically different this year, investing that ³refund² directly into an IRA against taxes paid for the previous tax year. This will, according to Ed O'Hanlon over at Bottiani, Gallucci and O'Hanlon, a CPA firm located on Portland, Oregon, save you an additional $284 by lowering your obligation to Uncle Sam. (The numbers used are based on the average Oregon income according to the latest Census Bureau numbers available.)
Suppose that person who received the $850 and the tax savings of $284, invested it and didn't touch it for thirty or so years. Assuming an modest return of 6%, that $1134 would have gained almost $5380 in interest before taxes. Remember that is based on one year's deposit and no additional contributions.
That one move netted a 34% increase in your refund and through the miracle of compounding and the normal growth of the investment in the equities or bond market, that investment may, all things being equal, grow fourfold.
Of course, you could save the money yourself but that would require you to march into your human resource office and change your W-4. The savings part would rely on you to direct that extra money.
The third evolutionary financial change requires you to put as much as possible in your 401(k) plan. Remember this is pre-tax savings, so a small percentage, say 3-6%, might not even effect your much needed take home pay. And if your employer matches, even better. (Future articles will discuss the tax ramifications of this type of tax deferred investment but the important thing to remember is to contribute, avoid using the default investment, ignore the incentives to own the company stock and if you do not understand the plan, ask for help. Using a balanced fund or an large cap index will be sufficient to get you going in the right direction as you learn more about this key element of your future.)
While the country we reside in remains geographically unchanged, the challenges facing the population would probably delight the outspoken Mr. Mayr. These three ideas will create fundamental changes in how we, as American consumers are treated by both politicians and business.
Perhaps some future economic biologist will take note how two groups, living side by side, could have evolved into such different groups, distanced by income and finance. Or they may be witness to somehting else.
If Main Street does not begin to save for the rainy day on the horizon, an evolutionary leap for a nation of spenders, then the species who consumes with abandon, saves little for the future, and ignores the warning signs that there is a possible economic Pangean shift ahead may not have much of a future. Paul Petillo's latest book is Building Wealth in a Paycheck-to-Paycheck World (McGraw-Hill). He is the managing editor of BlueCollarDollar.com, which takes a common sense approach to money