You know the image.  If you have been a kid in the last century it is very likely that you were introduced to saving by using the piggy bank.  The concept is that if you take loose change and put it somewhere that you can’t see then you will slowly but surely amass a fortune.  Something that I have seen for the past decade can be only described as the reverse piggy bank.  The concept a credit isn’t new.  However, some people do not understand the power for credit.  Credit can be best described as a reverse piggy bank.

If you open a credit card and carry a balance you will see this effect with interest charged by your bank.  The effect of the interest earned by a credit card can be relatively small by comparison to the debt carried.  Many do not understand that their minimum payments do not even account for 90% of their overall finance charges in some situation and worse in others depending on how high your APR is.  The other nice hidden secret of the credit card account is the minimum finance charge.  If only we could have a minimum interest rate on our savings accounts.  These interest charges can add up.

On the topic of credit it is also important to understand that credit is not a necessity.  We have been conditioned to believe that life cannot work without a FICO score.  On the contrary if you choose a savings based financial strategy and choose to save now and buy later you can avoid relying on these entities for the things you want in life.  Even a mortgage can be gotten without a FICO score as long as you meet a few traditional requirements such as job history and steady income.  The idea comes from the concept of self reliance.  Building up an emergency fund to fallback on when you would have traditionally used a credit card.

Things don’t happen on their own.  When someone tells me that they have no time to do the things they classify as high priorities such as spending time with kids and family, or taking time for themselves.  I tell them that they just don’t make the time.  In the same idea, you have to make room in your budget for savings.  Even with mounting debt it is important to have money saved.  This will keep you from having to use the credit card again in the event of an emergency.  Saving has to be a higher priority in certain circumstances then paying debt down.  Once you have a satisfactory level of savings saved then paying down debt can become a priority.

Some financial counselors recommend a savings of $1,000.  My personal test is the necessity failure test.  Take an item that you rely on to be there and to never fail.  A car is a good example.  Take the average cost of a pretty costly repair, such as transmission rebuilds or major engine work.  Use that as the goal of your emergency fund in the beginning of tackling debt.  If you consider the cost of some moderate auto work to be about $1,500 then that gives you an idea of how much you should have saved.  Everybody’s savings goals will be different and they should be.  There is no real good rule to follow other then the one based on your own finances.

Collecting money and saving is what will give you the things you want plus the satisfaction of knowing that it is all yours and no one else can lay claim to it, but even if you have money you still have to be smart with spending and choose toys, needs, and wants wisely.  Even a million dollars can be spent in the blink of an eye when it could have provided you true independence instead of a quick scratch of an itch that can wait.