SAVINGS DISINCENTIVE

We live in a day of economic turmoil. With each passing day, prices continue to rise with no end in sight. The markets have not experienced price stability for some time. There are many reasons for this, but chiefly government interference in the market always causes price instability. Government policies are set by people who are not governed by market forces. The government is not a profit seeking enterprise.

The Frugal Accountant was driving down the road the other day and he saw a sign at a Credit Union announcing their current Certificate of Deposit rate. A thought flashed into the Frugal Accountant’s mind in this regard. Interest earned on Certificates of Deposit and other interest bearing accounts are ridiculously low. Why would someone want to tie up their savings for five years at 3% interest?

It is almost to a point that you would be just as well off to put your money under a mattress. The Federal Reserve has been recently cutting the Federal Funds Rate. This is a rate that banks charge each other for using Federal Funds. When this rate gets cut, the banks in turn lower the amount of interest they pay on their interest bearing accounts. At one point, the Federal Reserve had cut the Federal Funds Rate to 1%. This made saving money for interest a joke.

What is the result of cutting the Federal Funds Rate? It encourages people to borrow money at an artificial interest rate. This interest rate is not determined by the market, but by bureaucrats. This gives people an incentive to borrow money, but there is a catch to it. The lure of debt is instant gratification. When you borrow money, you get the funds instantly without having to earn it or to have to save to get the needed funds.

Saving money requires self discipline. It requires being frugal i.e. not spending more than you earn. Borrowing money does not require any self discipline. Saving money takes time to accumulate and borrowing does not. The advantage of savings, as opposed to borrowing, is that it does not have to be paid back. A saver will always have the advantage over the borrower even at a lower interest rate.

This cutting of the Federal Funds rate has the effect of giving a disincentive to savers. There is a great cry that people are borrowing too much and not saving enough. The government’s policies give an incentive to borrow money and a disincentive to save money. This is the opposite of the way things should be. If the government should be promoting any policy, it would be encouraging people to save money. The government’s current policy is instant gratification which reflects our current society.

Another way that government discourages saving is the tax law. Borrowers get to deduct their interest payments on mortgages and for business loans. This reduces the borrowers tax rate. The tax law favors debt. Savings, dividends, and capital gains are taxed. This is a disincentive for saving money. This increases the tax bill for savers and saving is thus, penalized. Clearly, the government’s policy favors going in debt and not saving money.

BUYING BOOKS AT A BARGAIN

The Frugal Accountant is known for his frugality. He avoids retail as much as possible. The Frugal Accountant is an avid book reader, he would rather read a book as do almost anything else. The Frugal Accountant has a mind to feed. Yes, we eat mentally. The Frugal Accountant has a huge library that continues to grow. Book expenses are thus a part of the Frugal Accountant’s budget.

The Frugal Accountant is also a pastor of a church. In a way, pastors get paid to read. The church pays for the pastor’s books., this would be considered a fringe benefit. Even if the church did not pay for the books, the Frugal Accountant would use the same approach. The church like the Frugal Accountant has a limited budget and there are financial obligations that take precedence over buying books.

Book buying is to be taken out of discretionary income. Discretionary income is income that if left over after you have met all primary obligations. For the church this means the pastor’s salary, utilities, phone bill, water bill etc. These obligations have to be met first before considering spending money on books. This is basic budgeting. It is basic but it is amazing how many people spend obligation money on discretionary items and then do not have the funds for their primary obligations.

The Frugal Accountant avoids paying full retail for a book. He buys his books used. There are two main sources that the Frugal Accountant will utilize. One source is the used book store. Here he finds used books at bargain prices. The better the condition of the book, the more you will pay for it. Since these bookstores want to make money, the books that they have for sale are usually in good condition.

If you are looking for a specific book, the Frugal Accountant has found that using Amazon.com is your best resource. Amazon.com gives you access to a large supply of book sellers, which greatly increases the probability of your finding the book you are searching for. The Frugal Accountant has been reading Ayn Rand’s works. He received her book in the mail through Amazon.com, Philosophy: Who Needs It.. Though used, it is like new. Its retail price would have been $7.99, with sales tax for a total price of $8.75.

But through Amazon.com, this book came from Georgetown University for $1.50 with shipping of $3.99, for a total of $5.49. This is a savings of $3.26. Sometimes Amazon can work against you. He found the same author’s The Romantic Manifesto at $4.99 retail and with sales tax for a total price of $5.46. The Frugal Accountant paid $3.00 plus $3.99 for shipping for a total of $6.99 through Amazon. This was an overpayment of $1.53. The net savings of the two books was $1.73. All savings are good savings.

A disadvantage of local used book stores is that they may not have what you are looking for. This makes Amazon indispensable. Even though there was an overpayment for The Romantic Manifesto, there was a time savings in finding the book, this translates into a financial savings in money spent going to the book store and looking and not finding it and going back to see if it might be there the next time, etc. Going to a used book store can be unfruitful when looking for a specific book. This problem is alleviated by using Amazon.

An advantage of using Amazon is that the book is shipped to your house via USPS. When going to the used book store, you must also factor in your time and the gasoline used in going there. These are also expenses. Thus, by using Amazon, the Frugal Accountant got a book he was looking for and did not spend a lot of time and money trying to find it. Using Amazon increases one’s efficiency in finding specific books. This translates into added savings.

The Frugal Accountant says don’t pay retail, if you do not have to.

OFF DAY DEALS

The Frugal Accountant is always interested in saving money. There is no use paying full retail, if you do not have to. It is wise to be on the lookout for bargains and good deals. Sometimes, it is best to go to a venue on an off day. Most businesses know that at certain times of the year, they are not going to generate much business.

These businesses will offer incentives to their customers in the form of reducing the admission price. Paying reduced admission is better than paying full price admission. An example is a recent trip that the Frugal Accountant's family took to go to the Knoxville zoo. The trip took place today, February 9, 2008.

This might not be the ideal day to go, but it turned out just fine. The temperature was about 62 degrees which is not bad for a winter day. The Frugal Accountant did not actually go to the zoo. He dropped his wife and youngest daughter and returned later to pick them up. His youngest daughter's birthday is February 10th, so the trip was made for her birthday and so she could take pictures of the zoo animals.

The normal admission price for the zoo is $17 for adults. Since this the offseason, the admission price was half or $8.50 for an adult. This is a $17 dollar savings. The money saved could be used for other purposes on the trip, thereby reducing the total amount actually spent.

So when planning a trip to a venue, find out if you would save money by going in the offseason or on an off day. Remember don't pay full retail, if you do not have too.

UNDERSTANDING BANK RECONCILIATIONS

Many people can do things mechanically. They can do something without understanding why they are doing it this way. When it does not work out, they become frustrated. They are paralyzed because they cannot understand why it does not work. This is because the have learned this process by rote. They have the knowledge of a parrot. This is not thinking. Thinking means that you comprehend concepts. You know why you are doing what you are doing.

The Frugal Accountant reconciles all of his accounts. He knows the ending monthly balances of his bank, savings, and credit card accounts. He actively keeps up with his accounts. He has a recording system that allows him to track all deposits and expenses. He is able to call the bank or credit card company and have the same balances as they do. At the end of each week, the Frugal Accountant reconciles his accounts and makes sure that they correct with the bank and the credit card company.

The Frugal Accountant knows that you cannot make sound financial decisions unless your financial information is accurate. It is imperative to know your financial condition. Each month the bank sends out a bank statement. This statement reflects all the activity that occurred during the month in your bank account. Each month, there will be additions and subtractions. There are deposits and checks written, fees and debit card activity.

There will be what is known as timing differences between what you say you have in your account and what the bank says you have. A timing difference usually occurs toward the end of the month. If you write a check on January 31, this check will not clear the bank until later. The bank will show that you have more money in your account than is in your register. If the bank assesses you a fee, you do not have in your register but the bank has already subtracted this amount from your account. You need to make this adjustment to your register so that your accounts are reconciled.

Another timing difference is a deposit in transit. This is a deposit that you have made toward the end of the month that you have recorded in your register and the bank has not yet recorded. This difference is to be reconciled in the bank reconciliation that you prepare at the end of each month. You do a bank reconciliation each month, don’t you? Usually, when someone says that they are having financial problems, you will find that they do not reconcile their bank accounts. No wonder they are in financial difficulties.

The key to doing a bank reconciliation is understanding the issue of timing differences. Once you understand this concept, then doing a monthly bank reconciliation becomes a matter of mechanics. The Frugal Accountant has a Quicken Money Program where he does his monthly bank reconciliation. The Frugal Accountant does the church’s bank reconciliation on an Excel spreadsheet.

The bank statement should have a form where you can do your monthly bank reconciliation. The reconciliation starts with the balance per the bank. The timing differences of deposits in transit and outstanding checks come next and are added (deposits in transit) and subtracted (outstanding checks) to arrive at the adjusted ending bank balance. This ending bank balance is compared with the balance from your check register. If not the same, then check the bank statement for any fees. These fees should be subtracted from your ending balance and then you should have the same adjusted balance as the bank. Your account is now balanced and reconciled and you now understand the concept of timing differences.