Last week, the government reported that Americans saved 2.9 percent of their after-tax incomes during the last quarter of 2008. Considering that just a year ago, we were saving less than 1 percent, the current rate is almost unbelievable.

All that money that is being ’saved’ isn’t necessarily going into a bank account. Money put towards debt reduction is actually counted towards savings. Robert Frank, an economist at Cornell University, told AP, “For economic purposes, paying off debt and saving are the same,” he said. “Incurring debt is negative savings; paying down debt is savings.” Frank believes that the current trend towards savings is actually a long-term behavioral shift: as a culture, we’re going to start value saving or spending much more than we’ve seen in the past few decades.

The trend towards savings is only growing right now, according to many economists. It’s not out of the question that the savings rate could rise to 6 percent — or even higher — in the next few years. I know that I’m working hard on getting at least a few more dollars into savings — and I’m pretty sure that a lot of people share my mindset these days. Unfortunately, economists think that approach is bad for the economy. Because we aren’t out there turning the cogs of commerce with what amounts to a substantial chunk of what used to be spending money, both the retail and manufacturing industries are taking major hits. If we aren’t out there spending money, the recession gets deeper. If the recession gets deeper, we save more and spend less. The economy is caught in a Catch-22.

The current economic situation isn’t the end of the world, though. The fact that many Americans are saving — are able to save — shows that there really is a light at the end of the tunnel. Yes, the economy is not in great shape right now and, as Americans do the right thing for their own finances, there’s a chance that the recession can get deeper still. But saving and paying down debt remain the right things to do, and they offer us a chance to come through the nation’s economic troubles on a more solid footing of our own.

Through saving and eliminating debt, we have an opportunity to build a better economic future, even if the economic present isn’t particularly wonderful. The past several decades saw record levels of spending — unsustainable spending — which now must be resolved. That means a recession. But when the recession is over, we’ll be more comfortable with our finances. It’s just a matter of getting through the current economic troubles: doing that is just a matter of saving and getting out of debt. Despite what the government might want, we need to take care of our personal finances now. It might not hurt if the government did the same — as much as cutting spending will hurt, it could provide a more long-term solution than throwing money at a recession economy.

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It’s always nice to get a little cash. Maybe you got a bonus at work, maybe Grandma sent you a birthday present or maybe you won the lottery. Once you’ve got the money in your hands, though, you have to decide just what you’ll do with your windfall. I’d suggest sending it my way, but I think that these five tips will help you more in the long run:

1. Set up an emergency fund. Emergencies do happen, and it’s always good to have a little spare cash on hand. It can be hard to build up a rainy day fund when your paycheck barely covers your day-to-day bills, but unexpected cash can build up your fund quickly.
2. Pay down debt. Debt costs more than it’s worth in the long run. The more that you can pay now reduces the interest you’ll have to pay later — and that holds true for ‘good’ debt like student loans and mortgages.
3. Save towards a goal. Big goals, like retirement and college for your kids, take plenty of savings. Every penny you can add bring your goal a little closer. The same holds true for smaller goals, like that big-screen tv you’ve been eying.
4. Spend it. While one of the easier ways to build wealth is reducing spending, sometimes there really are things that you need to buy. It’s better to spend your windfall than put it on your credit card, at the very least. And if you get good value for your money, spending it is a perfectly respectable plan.
5. Use it to earn more. If you’ve got a windfall that you don’t need for anything else, consider putting it to work for you. If you have your own business, you might be able to invest in some new equipment. You might also be able to invest it in other companies through stocks and other earning instruments.

Out of these suggestions, I’d like to recommend my personal approach. Any time I have a bit of a windfall, I like to handle it in the following manner: I set aside 10 percent as ‘fun money.’ Depending on how much I have, it may not be enough for much more than a paperback at the local bookstore, but I do feel it’s important to reward myself for my hard work. I might also put my fun money towards a bigger purchase — it may go into a savings account earmarked for a vacation, for instance.

I know that many people will set aside 10 percent for some sort of charity. While I don’t always do so, I think it’s a decision worth considering. I would also recommend setting aside enough to cover taxes. Whether or not you think the IRS should get a chunk of your windfall, the IRS is the one that gets to decide — and they always decide in their favor.

This pie does start feeling like it’s been sliced kind of thin at this point. I always decide on one — and only one — place to put the rest of the money. I might put it in my emergency fund, I might put it towards my student loans. But I don’t try to divide it up into little chunks for each of my goals.

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There are plenty of tactics that financial experts recommend for getting your spending under control, such as tracking your spending. Personally, I’ve found tracking my spending very useful for small purchases, but less so for larger ones. With big purchases, I know where my money went and I know how I justified it. I often have an easier time justifying a large purchase to myself than a small one.

One technique that I’ve found works better for getting big spending under control is setting a buying period. I only allow myself to make purchases over a certain level two or three days a month. This is not an absolutely ironclad rule, of course. Expensive emergencies pop up occasionally. But I’ve found that if I’m fairly strict with myself about waiting to make a big purchase, I often wind up not making the purchase at all.

Purchasing impulsively: I often flat out forget that I ‘had’ to have that shiny new toy just a few minutes after I walk out of the store. Most stores are designed as sales machines — they’re set up to make you want stuff you may not even know exists. But if you make yourself wait before making a purchase, you may avoid making the purchase entirely.

Making do: If I have to wait to buy something, I often find a way to get the same affect for cheap. For instance, if I want to buy a bookshelf but I’m insistent on waiting until the end of the month, I might see what scrap wood and supports I can get my hands on. It’s very possible that I’ll come up with that bookshelf without paying a single cent.

Hitting the sales: Certain big purchases tend to go on sale almost every month for a holiday. This weekend, for instance, tons of stuff will be available for cheap just for the 4th of July. Making yourself wait a couple of weeks to make a purchase actually makes it easier to hit sales and collect coupons that can bring the overall price way down.

Going for availability: I’ve had the unfortunate experience of buying a new piece of computer equipment only to find out that I missed a price drop or an upgrade by only a few days. Adding in a self-imposed waiting period can provide you with the time to do a little research on your planned purchase and make sure you get the newest, cheapest version of whatever you’re after.

Putting off a purchase tends to work well for buying furniture, computer equipment and other durable goods. I try to stick to $100 as my limit, although I’ve been known to go much lower to help limit my purchases of DVDs, books and other small items. The actual dollar limit can be adjusted to whatever works with your lifestyle and your area. I know people who routinely spend $100 on groceries — that limit probably wouldn’t work so well for them.

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Whether you’re saving up to buy your first house or working on eliminating some credit card debt, just about every financial guru will tell you to be frugal — to cut down on unnecessary expenditures. It’s such widespread advice because it works — brown bagged lunches, fewer Starbucks lattes and wearing clothing that doesn’t require dry cleaning can help free up a lot of money in our collective budgets.

But a new budget is like a new diet: after a few days or weeks, we start asking ourselves just how long we’re going to suffer. How long are we going to deprive ourselves of those nights out with friends or that new DVD that we really want? When can we stop being frugal?

Well, it depends on how we depend frugality. After a while, we get used to certain parts of living on a smaller amount of money each month, but that can be boiled down to simple budgeting. We really shouldn’t ever stop managing our money; there may not be another house in our future, but it’s surprisingly easy to slip into bad credit habits even if we’ve been down that route before.

Depriving ourselves of every little luxury, though — I don’t actually consider that frugal. Most of us start keeping an eye on our finances in order to make our lives more comfortable. And part of that comfort is those little luxuries. Even early on in the budget-making process, I recommend putting at least a few dollars aside each month with the intention of having a little fun.

I’m not recommending bringing those lattes back into the budget, unless good coffee really is one of your favorite things in life. Instead, consider your options. What really is the most enjoyable part of your day? What makes you want to get up in the morning, or grab a friend to talk about? That’s where your luxury budget should go. And don’t stick with the same thing every month — our wants and needs change. This month, I may be eying a particularly good book, but next month, I may want to go out for a night on the town with my friends.

And as I’ve become more comfortable with my financial situation — less debt, more savings — I’ve even increased the amount that I put towards the little comforts of life. I’ve made a point of keeping some money in savings, building towards bigger purchases like a new computer or another luxury item.

Removing every single luxury from your life may seem like a good idea if you’re trying to reduce your spending. But if you do, you’ll make yourself miserable. You may not be able to stick to it, either. I’ve got to go back to that diet metaphor: a lot of people go on diets and do pretty well the first week. Then they slip up, and go back to their old habits. It works the same way with budgets, unfortunately. The best thing you can do is make your budget a little more comfortable. Sure, it may take a little longer to save up for that house or to pay off that credit card bill, but you’ve got a better chance of making it.

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You would never turn down free stuff, right? A free meal? A free car? What about free money? Every day you choose not to save money, you’re turning down free cash.

Admittedly, a lot of this free money is down the road — it’s available in tax incentives or interest. But there are significant reasons to save money while you can.

Retirement Accounts

If your employer offers a 401(k) plan with any sort of matching, there is absolutely no reason not to invest in that plan. Any matched funds really are free money — that’s money your employer won’t give you in any other situation. Even better, any money that you contribute to your 401(k) plan doesn’t show up on your taxes. If you earn $50,000 next year, but deposit $3,000 in your retirement account, you’ll only pay income taxes on $47,000. Most other retirement plans, such as IRAs, also provide tax incentives for saving.

College Funds

If you have any children, there are a whole list of college savings options — and there are plenty of rewards for using them. A 529 plan, for instance, can reduce your state income tax bill in some states. Money deposited in a 529 also grows tax-deferred and tax-exempt money can be withdrawn for college expenses. Basically, that means that you can avoid paying taxes on the money you earned to send your kids to college. Other college savings plans offer a variety of incentives, and many of them make it easy for your children to also save as well. Every dollar that your child can save for college before the fact is a dollar he or she won’t have to pay interest on after graduation.

Health Savings Accounts

Health savings accounts have some major advantages, especially for people unable to obtain health insurance. That’s a pretty big chunk of the U.S. population, and if you’re included, you probably haven’t done too much planning for a health care emergency. An HSA, however, allows you to save money exclusively for the purpose of covering health expenses, from immunizations to surgeries, as long as you are enrolled in a high deductible health plan, which is fairly inexpensive. Deposits made to an HSA are tax-advantaged: depending on how you set it up, you can save either pre-tax or post-tax dollars. Either way, though, your taxes will go down.

Interest

While interest isn’t the coolest way to make money, it is steady. You’ll never get rich working a steady job, but if you can keep your money earning interest, it can build up surprisingly quickly. In fact, interest is one of the key methods for making retirement accounts and college funds worthwhile. Otherwise, I think most of us would keep our savings in a jar buried in the back yard (and off the books so that we could avoid taxes).

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Saving money is like being on a diet. And like most Americans, we’re pretty bad at sticking to them. What then, is the solution to being financially fit? The same techniques you use to get rid of that spare tire are the ones you can use to keep that spare change.

Saving money is difficult for most of us mainly because we don’t have a lot of it to begin with. So in order to put some cash away, we have to deny ourselves the little instant gratification purchases we get everyday. Being able to stop ourselves from grabbing that candy bar, coffee, or MP3 download is exactly the same kind of willpower that is required for staying away from Big Macs and cheesecake.

But saying you’re going to do something and doing it are, as we know, incredibly different things. Everyone makes that New Years resolution to lose a few pounds and put away a few bucks for vacation, but inevitably at the end of the year we’re heavier than we were and in debt. So I propose an interesting solution, one that will impact both your gut and your wallet: take all the money you’d spend on snacks and take-out, and save it. Here’s a breakdown:

Say you spend about $15 a day between lunch, snacks, and coffee in the morning. If you start eating healthy, make your coffee at home, and take other calorie and cost cutting measures, you can get down to $5 a day. Now that extra $10 you’ve been spending is suddenly in your pocket. What do you do with it? If you leave it alone it will become $300 at the end of the month. Not bad. But if you invested that $300 with a 5% rate of return, after five years you’re looking at $20,402. After ten years? $46,585. Not too shabby!

But this is where saying you’ll do something, and then actually doing it comes into play. After reading those numbers on paper the plan doesn’t seem so bad, in fact it seems fairly easy. But there will be mornings when you look at your carrot sticks and think “what I would give to have a bacon egg and cheese sandwich right now.” Stay strong. A little slip up now and then isn’t the end of the world, but it can be a slippery slope. Many people who have trained themselves to deny the easy and the quick did it by simply making it routine. Remind yourself why you’re doing this, you want that vacation, you want that new car. Put up pictures of something you want to use the money for, keep a ledger of how much money you’re earning each day and watch it grow. Seeing your balance get bigger (and hopefully your gut get smaller) will inspire you to keep going.

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