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Saving for a Rainy Day (and a Long Dry Spell)

crownfinancialstewards on 10/31/12 3:11 PM

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The origin of the saying “Save it for a rainy day” has been lost, but the meaning remains clear. We should be frugal during “good weather” so that we have something to fall back on when times are bad. Americans understand the meaning, we just don’t seem to do it. In fact, we have it backwards.

In the chart below, compare the rates of personal savings during U.S. recessions since 1950. It’s clear that we tend to save during the rainy days and spend all we have when the economic storms have passed. The shaded columns indicate periods of recession. Note how savings rise dramatically during those periods.

The chart provided by the Federal Reserve Bank of St. Louis shows that we briefly spiked to a high of near 15% personal savings in 1975–76 to near zero in 2000-01.

To be fair, these numbers do not reflect the rate at which Americans invest long term. It only reflects our tendency to save in more liquid assets, such as savings accounts and CDs. The danger is that far too many people are only setting money aside in pre-tax retirement plans, leaving them without access to needed cash without penalty during a financial crisis such as a job loss or health issue.

In my book, The S.A.L.T. Plan, I examine God’s wisdom that enabled Joseph to prepare the nation of Egypt for a seven-year drought—the longest recorded famine in Scripture. I believe that same course of action can prepare us for an economic downturn of biblical proportion today. The two lessons from Joseph’s story in Genesis 42 are clear and remain relevant.

First, we are to save during the good years. Yet, as you can tell from the graph, our savings habits improve only during the lean years. We should view every good year that the Lord gives us as a blessing and an opportunity to prepare for unknown challenges ahead.

Second, Joseph collected and stored 20 percent of the grain harvest for seven years, or the equivalent of 140 percent of the total grain produced in a single good year. We should strive to do the same today with our personal cash resources. Given the uncertainties we currently face, we should save 140 percent of our annual income and only then begin long-term investing. In this way, we’ll be in a position to provide for ourselves, our families, and even to help others should we experience an economic event on a biblical scale, which, by the way, more than one economist has forecast.

One final note, in Joseph’s plan, the government of Egypt did the saving. The Bible says nothing about the people saving. In fact, the people were forced to pay 20 percent of their grain in taxes to Pharaoh. Later they were further compelled to purchase the grain from the government during their time of need. This important fact needs to be noted—the government did not store the grain in order to provide free handouts to its starving citizens.

We’re already being taxed substantially more than 20 percent by government at all levels. Not only is that money being spent as fast as it comes in, government is borrowing vast amounts more. Unlike ancient Egypt, our government will be hard pressed to save us in an extreme economic crisis.

My advice is to take Joseph’s plan and apply it to your personal finances. Once you achieve the 140 percent savings goal, then begin long-term investing. This will prepare you not just for a rainy day, but a very long dry season as well.

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