SLADE COLUMN: South Carolinians lack savings
A new study by the Corporation for Enterprise Development concluded “nearly half of South Carolina residents are living on the edge of financial disaster with almost no savings to fall back on” in a crisis.
That dire finding, which ranked South Carolina 48th for the financial stability of state residents, goes right to the issue of how financially precarious many folks' situations are.
Without savings, ruin can lurk behind a potential job loss, disability or health problem.
If there's any silver lining in the report, it's in the finding that 81 percent of “middle class” households, defined as those earning between $47,593 and $71,580 yearly, do have at least three months of savings set aside (defined as $5,762 for a family of four).
The rest of those middle class households, and most households in South Carolina with lower incomes, are the “liquid asset poor.”
That's an important distinction that goes to key questions about how people save. People can have assets, such as home equity, and still be “liquid asset poor” because those assets may be hard to turn into cash in an emergency.
That's something we all need to think about when making decisions about things like whether to focus on paying down the mortgage, building up an emergency savings fund or feeding a retirement account.
I have seen people with plenty of home equity lose their properties because they couldn't pay the taxes, and that's a tragedy that should be avoidable. The hard part can be that once a person is in financial trouble, it may be too late to refinance a mortgage or secure a home equity loan.
Every asset a household has is some form of savings, whether it's cash in the bank, home equity, vehicles or retirement plans. Some assets can be accessed in an emergency with relative ease, while tapping into others could trigger taxes, penalties or loan interest.
Some households have virtually no savings, but consider that more than a third of South Carolina homeowners are mortgage-free.
And some of the highest rates of debt-free homeownership are in the state's poorest, rural counties.
I reported in a 2011 story that according to census data, Allendale County, which often has the state's highest unemployment rate, also has the state's highest rate of mortgage-free homeowners. Allendale was among nine rural counties where more than half the homes were owned outright.
Even in Berkeley, Charleston and Dorchester counties, nearly one in four homes were owned mortgage-free, according to the 2010 Census.
Being mortgage-free has long been a top goal of homeowners, and for good reasons. But with mortgage interest rates now at generational lows, homeowners with the ability to make extra loan payments may want to consider other priorities, such as building up emergency savings or retirement plans.
Also, those who are taking advantage of low loan rates in order to refinance might consider setting up a home equity line of credit at the same time as a new mortgage. A line of credit allows homeowners to tap home equity if they need to, when they need to, usually during a fixed period of time such as 10 years.
Retirement funds also can be a great way to save for the future and plan for emergencies at the same time.
With a Roth IRA, for example, contributions can be withdrawn without taxes or penalties, unlike a traditional IRA. Earnings in a Roth account are taxed, and subject to early withdrawal penalties, but not the original contributions.
So, in a true emergency, a Roth IRA can serve as emergency savings. Meanwhile, people with modest incomes can get a federal tax credit for funding a Roth IRA, worth from 10 percent to 50 percent of the amount contributed (online, see IRS Tax Topic 610 or Publication 590 for information).
That combination makes the Roth IRA my personal top choice for people with low to moderate incomes, combining tax credit incentives and retirement planning with a relatively easy and penalty-free way to access the contributed funds if financial calamity strikes.
Those with lower incomes who may be getting an Earned Income Tax Credit check in the coming months might consider putting a little of that money aside in a Roth IRA.
Traditional IRA funds can also be withdrawn without the 10 percent penalty that usually applies to “premature” distributions prior to retirement age, in certain circumstances involving health insurance costs, disability, higher education costs and more.
Taxes still apply (because the original contributions were likely tax-deductible), and there's paperwork involved, making traditional IRA withdrawals for emergencies more complicated than withdrawing Roth IRA contributions.
While these are some good saving strategies, none make it easier for people to save if they have no money to spare. It's fine for experts to recommend having between three and 12 months of expenses saved up, but lots of people spend every penny they earn just getting by.
Setting out to save such a large amount of money may seem so daunting that people with modest incomes may not try, but all savings start small.
Having a savings account at a bank or credit union is a good start (nearly a third of households do not, according to the Corporation for Enterprise Development).
Opening an IRA retirement account is a strong next step. And avoiding high-interest, short-term loans such as credit card debt, title loans, payday loans and tax advance-refund loans is a key step toward financial success.
Reach David Slade at 937-5552 or Twitter @DSladeNews.