Thursday, March 22, 2012

A Penny Saved is a Penny Earned ..... Still True?

By Samantha Peters, Freelance Writer & HR Expert

You've heard it before, “a penny saved is a penny earned.” While it is not rocket science, you may not know exactly what this adage means and what it refers to. The phrase alludes to an age old belief that saving money is a safe way to generate earnings, which is to say being frugal with your money as opposed to spending it thriftily is the right way to go. The operating principle here is that it doesn't matter how much money you earn if you're living beyond your means or at the edge of your income without investing in a savings plan. The prudent financial planner will research his/her best options for savings accounts and the best CD rates out there while also practicing shrewd financial discipline with regards to discretionary income.

But in an age of rampant, widespread, systemic debt—credit card, student loan, home mortgage, federal, etc—does this belief still apply? If a person owes a considerable amount of money to creditors, does saving that money for emergencies still count as earning money, even though it is being used to subsidize a debt that is likely accruing interest? This is a question many people ask themselves on a daily basis. “I am saving money, but I owe a hefty balance on my credit card. Should I continue to make monthly payments, or should I pay the whole amount and rid myself of this financial burden?”

There is no one correct answer to this question. On one hand, paying off a debt builds good credit over time, which will likely allow you to secure better credit rates in the future and save you money on a home, credit card line, or car insurance quote. Paying a debt slowly, incrementally, also allows you to invest money in different pursuits and sureties, diversifying your financial portfolio while having funds tucked away in the event of a medical or other emergency.

On the other hand, the money you are saving and diversifying is costing you a fee in the form of interest rates on your financial debt. You are essentially paying more to have more. Over time this can cost you thousands of dollars or more. Many people have found that by procrastinating the full payment of their debts they have paid nearly twice as much money than the original balance.

Each person's situation is different. If you have a reliable job with a stable income, it may make more sense to go ahead and pay off your debts in full so that a penny saved truly is a penny earned. Paying off debts can also free you up, physically and mentally, for other investments. But if your situation is not as secure and you are essentially living paycheck to paycheck, saving is part of a larger practice that involves learning to be financially responsible. Ultimately, this is a value that will be indispensable to anyone looking to build savings and create long term financial security. The choice is yours, but be sure to contextualize short term solutions within the broader outlook of your future.

About the Author:
This is a guest post written by Samantha Peters, who enjoys blogging on career and HR covering topics of particular interest to women in the workplace.

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