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Saving: the new normal

By Marcie Geffner ·
Sunday, September 4, 2011
Posted: 8 am ET

What's more important: Paying off debt or increasing savings?

The answer, of course, is "both," according to Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, or NFCC.

"As important as it is to handle debt responsibly, the truth of the matter is that the unplanned emergency is inevitable, and savvy consumers will recognize this and prepare for it," Cunningham said in a statement.

Still, a little history suggests many consumers haven't yet figured out how to balance both of those priorities. Instead, they tend to cut back on purchases and increase savings more during rocky economic times.

In January 1959, the first month that the Bureau of Economic Analysis collected savings data, the U.S. personal savings rate was 8.3 percent of disposable income, or approximately one-month's take-home pay in annual savings for the average person, according to the NFCC.

Compare that to the years just before the Great Recession, which started at the end of 2007, when the U.S. savings rate plummeted to less than 1 percent of disposable income.

"Credit replaced savings as the family's safety net," Cunningham said, "with some arguing that savings was unnecessary since they could charge or borrow their way out of any unplanned event."

Not true, and the lesson apparently has been learned at least by some as the savings rate has climbed more recently to approximately 5 percent of disposable income.

Admittedly, it's not easy for everyone to save, especially when rising prices -- technical term "inflation" -- mean that more disposable income is expended for the same everyday purchases.

Yet saving is still important, even in an economy that places a big premium on debt reduction.

"In bad times, people save out of a fear of tomorrow and in good times, they spend as if there were no tomorrow," Cunningham said. "To turn this savings/spending cycle into financial stability, consumers should recognize the unarguable importance of saving and develop a systematic plan to meet their personal savings goals."

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