Personal Savings and the Importance of Having a Buffer Account Amidst A Depression/Recession

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In order to protect yourself against having to utilize high-interest credit/loan products amidst a recession, the best advice is to increase your financial knowledge, lower your taxable income and start SAVING!

According to a study released from the Political Economy Research Institute (PERI) located at The University of Massachusetts-Amherst, "for the entire last business cycle, March 2001 through December 2007, the personal saving rate averaged 1.4% or less than one-third of the 1990s (Weller and Lynch, 2009)."

The study conclusion is that the debt boom is closely related to the low saving rate. Which means if people start saving now they may be less likely to feel the financial losses in a sour economy.

"Families' financial buffer for emergencies narrows when wealth declines. Measures of economic distress have thus risen alongside wealth declines to historically high levels. For instance, at the end of 2008, 11% of mortgages were either delinquent or in foreclosure (MBA, 2009). Also, the share of credit card debt that was in default at the end of 2008 climbed to 6.3% of all credit card loans, 52.4% higher than a year earlier (BOG, 2009)."

A depression or recession may NOT seem like the most convenient time to save but this study points out that the people who fair the best in a weak economy, and in long-term debt freedom, have savings and/or buffer accounts. The study also recognizes certain tax credits Americans should take advantage of to lower their taxable income. However, the study suggests a broader more encompassing tax credit that doesn't just reward Americans for saving for education, medical needs or retirement specifically, but rewards anyone who saves, in general. And the tax credit should be available to higher-income earning families (max $70,000) to adjust for the increasingly higher costs of living.

With the rise of traditional debt and new alternate forms of debt including payday loans, our best course of action is to begin saving for our future today. No matter what the amount is, anything is better than nothing. If Americans continue increasing their debt-to-income ratio, most middle class and lower-income families have and will continue to be a victim in a vicious unsecured debt cycle.

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