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Steve Bucci, the Debt AdviserNow more than ever: Start saving!

Dear Debt Adviser,
Lenders like to tell us to "cash out the equity in your home." What they really offer is a loan that must be paid back in full, with interest. The only true way to access the equity in a home is to sell it. People might be more careful with debt if they looked at it this way. Comments?
-- Jim

Dear Jim,
Your letter came with perfect timing. I wanted to address the savings rate issue that has been in the news lately and your observation about home equity borrowing fits in nicely.

The Commerce Department reported recently that the personal savings rate for Americans was minus 0.5 percent in 2005. The savings rate has been declining since the 1980s and still shows no signs of leveling off now, even though it has officially gone under water. So what does this mean to my average reader? Is it the beginning of the end, a milestone on the road to financial ruin, or just another outdated indicator that is being hyped to sell advertising on the evening news?

What if I told you that the savings rate is really 6 percent? Would that make you feel better? Well, it is among working Americans, according to the Employee Benefit Research Institute. The EBRI says that when you add in the retirees who are drawing down their savings at a rate of about minus 12 percent to minus 14 percent a year, that's what tilts us into a negative savings rate. More retirees will mean more negative savings rates to come. So, while not a great thing from a personal finance perspective, it's not a catastrophe.

Economists are divided -- what a surprise -- on the economic effect of negative savings, and I'm not sure I'd believe them even if they all agreed. What it may portend is higher interest rates to encourage more savings and less borrowing.

But are YOU saving? If the answer is "no" or "I can't afford to save" or "I will soon," you are in trouble. The housing market bubble that has been swelling net worth is beginning to deflate. Speculators and the overleveraged will have a severe dampening effect on prices in 2006. Interest rates are up, minimum credit card payments are up and raises are small. Without adequate savings, a layoff, illness or any other of life's little surprises can knock you for a loop. A fat savings account is the only padding between you and a very hard landing.

I cannot overstate the importance of having an emergency savings cushion of three to six months of living expenses. The money put aside in savings can mean a real difference in a financial crisis. Not to mention saving marriages, friendships and even lives.

Now to actually answer your question: You are absolutely right that "cashing in" on your home equity with a loan or line of credit is exactly as you describe it: a loan that you must pay back with interest. It is also a loan that is secured by your home, which is put in jeopardy if you are unable to pay back the loan. One of the greatest advantages workers have in the job market is the ability to move to a new location to take advantage of changes or opportunities. If, because of declining home values, you find yourself owing more on your home than it is worth, you won't be able to move unless you come up with the difference in cash -- that is, savings.

So, my comment is this. Having home equity in the 2005 real estate market is not savings nor is it a retirement plan. If you are saving, keep it up. If you aren't, start today. Start small to build a savings habit. Stop borrowing without a repayment plan! Learn to live on your current income, including an amount for savings. You will not regret it. I promise.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.'s corrections policy -- Posted: Feb. 3, 2006
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