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Best and Worst of 2005 2005 was a bad year for cash. The worst thing you could do with your cash was to keep it in a savings account. Let’s review how a combination of factors actually cost you money in 2005. What’s a Dollar Worth? If you had a dollar in a savings account all year, it’s probably worth less in December than it was in January. How? A dollar that sat in a savings account can’t buy the same value of things that it could earlier in the year. In other terms, you’ve lost purchasing power. Savings account rates didn’t increase quickly, but the price of gas sure did! A combination of increased global demand, a season of travel, and a series of storms meant that we’d have to pay a lot more at the pump. Nation without cash In a survey of 38 countries released last week by ACNielsen, the United States ranked first -- top in the world -- as the country with the highest percentage of consumers living paycheck to paycheck. More than a quarter of us -- 28 percent, to be exact -- said we "have no spare cash" after paying for our essential living expenses. Meanwhile, countries such as the Philippines, India, Mexico, Indonesia and Thailand boast the highest savings rates. These countries ranked at the bottom (a good thing for them) in the no-spare-cash department. Does the irony grab you by the collar and hurl you across the room? The United States is the richest country in the world, with the highest gross domestic product out of 192 countries. GDP is defined as "the value of all final goods and services produced within a nation in a given year." On a per capita basis, the United States ranks third out of 192 countries. The Philippines ranks 107th; India, 125th; Mexico, 66th; Indonesia, 121st; and Thailand, 72nd. Obviously, we can't attribute our strapped-for-cash predicament solely to our financial circumstances. We live in a rich country and, as a whole, are not deprived of income opportunities. Yet, somehow many of us fritter away our hard-earned resources. We know our government is operating in the red. Budget deficits have been a problem, off and on, for years, and it doesn't seem to have any long-term negative consequences for our country. At least, the average consumer doesn't see it. And that doesn't even take into account our astronomical national debt , which we hardly ever read or hear about anymore. Thanks to consumer spending, the U.S. economy is recovering. Americans are contributing to our nation's welfare when they buy services and products. Personal consumption expenditures represent the biggest component -- as much as 70 percent -- of GDP. It is our patriotic duty to spend. Isn't that what President Bush told Americans to do after the Sept. 11 attacks? Go about your daily business, he said. Go shopping. Madison Avenue works hard to distract us from long-term goals, turning our attention to desires that must be gratified right away. Advertisements make us long for rugged independence via a new pickup truck, youthful beauty from expensive skin-care products, a better golf game with a set of superior clubs. It's quite common to supplement our lifestyles by drawing upon reserves we haven't yet earned. We routinely tap credit lines extended by card companies, banks, and finance firms, some of it backed by collateral, some just unsecured debt. Yet deep down, we know that the ant is the better insect to emulate. It's just not as easy to save as it is to spend. Indirect savings incentives Vexed by the paltry savings rates among Americans, politicians have introduced tax cuts to get us to save. They've come up with numerous breaks designed to motivate us to hoard money for retirement, for education, and for the sake of saving itself. While on one level we welcome getting tax breaks, we don't always make the connection between taxes and savings. And that's probably because our tax code is extremely difficult to understand, something we only deal with when absolutely necessary. We're not deadbeats To our credit, Americans are focused on paying off debt. We have few tax incentives for keeping debt on our balance sheets (mortgage debt is the big one we can count on writing off each year). Some 37 percent of U.S. respondents in the ACNielsen survey said they use their spare cash to pay off debts, credit cards and loans. This compares to the global average of 31 percent. Nevertheless, we need to learn from the cultures in the world that can teach us to save money. Less than a quarter of the Americans taking the survey said that after paying their living expenses, they put their spare cash into savings. This compares to the global average of 36 percent. Meanwhile, more than half of the respondents in the following 11 countries said they normally put their spare cash into savings or investments: the Philippines, Taiwan, Singapore, Indonesia, China, India, Hong Kong, Thailand, Korea, Malaysia and Japan. What is it about their cultures that enable them to be better savers than Americans? I can't say for certain, and I hesitate to generalize, but I suspect that folks in many of these countries have more exposure to poverty than do folks in Western countries, and poverty is something they would work on avoiding. They do this by saving money today for tomorrow's possible needs. The American population, as a whole, needs to understand the trade-offs between saving for the future and living for today. We need to strike a balance somewhere between the adventurous attitude of the grasshopper and the no-nonsense, seemingly no-fun, outlook of the ant. But if we had to choose between the two, we would do well to adopt the adage of the ant. In the end we really must rely on ourselves to prepare for the challenges that lie ahead. BUDGETING A budget is the first step towards being in control of your finances. It will help you work out the most important things you spend your money on, and where you can cut back your spending. A budget is first start towards being in control of your finances. It is a plan that helps you identify anticipated income, expenses, and savings on a regular basis. Budgets also enable individuals to identify the level and importance of their expenses and help us see exactly where our money goes. It is also important to set and keep in mind your goals while preparing your budget. Why do I need to budget? Making a budget helps you to: Eliminate stress, by planning and monitoring your spending habits. Know whether or not you are in control of your finances Know how much you have coming in each week or month, and how much you have to spend. Cut back on unnecessary spending. Save money How do I create a budget? Budgeting is not difficult, although it may take some concentration, and a bit of work. And you do not need to be a financial or math's genius to do it! The following tips will help: Be honest - Don't try to skip certain items, or underestimate your spending Be consistent and accurate - Making a budget involves keeping a regular check on what you are spending. Try to be consistent and accurate, and keep records of what you spend. Steps to create a budget Use the simple budget form or calculator and follow the steps below to create your budget Work out your income. Make sure you are taking your net income i.e. income after tax. The pro-forma example shows you the sort of headings your income could come from List your regular commitments. This includes things like Council Tax, mortgage, rent, heating, insurance, etc. Add up what you are spending on normal day to day living expenses - this includes things like shopping for food, clothes, transport, entertainment, and so on. Record what you spend on occasional items - such as birthday and Christmas presents, repairs or decorations to your house or flat, holidays, etc. These items are spent on irregular occasions but it is helpful to put in a monthly amount. Make sure that the income and the spending is for the same period. For e.g., if the income is a monthly figure, the spending should be a monthly figure as well. Total your income and total your spending. If the spending is more than the income, it may mean that you need help with your finances. It is important to review your budget monthly and adjust it as your income and expenses change Defining your Goals To manage your money effectively, it is important to prioritize your spending. This may vary from person to person but a general guide could be: First, pay your bills. Make sure your most important expenses are covered each month - for example, rent or mortgage, utility bills and your car payment Your day-today needs, like groceries and transportation. Occasional costs come up quarterly or yearly. Make sure you have put money aside to finance those. Save some money for emergencies. Unexpected situations can occur and it is helpful to have an emergency fund The next step in saving would be to set aside money for future goals such as buying a house, education etc.