Personal Savings Rate Jumps: Did Yours?

The personal savings rate jumped to 6.9 percent in May, according to the Bureau of Economic Analysis. While there is much debate about how to accurately measure household savings, clearly people are spending less. The question is, are you actually saving more?

It's one thing to stop spending, but it's another to have a strategy for the cash you aren't spending. Without a strategy, you'll likely find that your thrift hasn't translated into a higher net worth.

What often happens is people cut back on spending, accumulate some cash and then end up spending it later. To make any meaningful difference in your finances, you've got to implement a practical and long term strategy for increasing your net worth.

There are two basic ways to do it: pay down debt or add to your retirement accounts. Both approaches offer the opportunity to permanently and positively alter the course of your finances.

• Pay Down Debt. Since debt is the biggest challenge for many families, reducing your debt is one of the first things you should consider doing with any extra cash flow. Now, you don't have to dedicate all of your savings to this strategy, but some is a good idea. The return you get from paying down debt is basically equal to the interest you don't have to pay on that debt. So if you have credit cards at 12 percent, the return on your money is 12 percent for each dollar you commit to reducing the principal.
• Increase Retirement Savings. If your debt situation is manageable, then you should consider taking some of your savings and contributing it to your retirement plans. If you have a 401(k) with a match, not only are you adding your savings, but you're getting an extra boost from your employer. Even without the match, you're building long term assets and getting a tax deduction as a nice bonus.
• Make It Automatic. Regardless of whether you choose to pay down debt or increase your retirement savings, you've got to make it automatic. The nice thing about most financial transactions these days is that technology allows us to set them on autopilot. So take advantage of those features.

The important thing to remember is don't try to rush the solution. It's like losing weight. You need to make a sustainable lifestyle change, otherwise you'll find you're right back where you started six months from now.

Bottom line. Almost all good advice for improving your finances is common sense. But executing on it is the tough part. Start small, make it automatic and give yourself a victory.

As with all financial matters, consult your individual advisor prior to making any decisions.

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