In today’s Wall Street Journal, there was an article about how the increase in personal savings rates may end up slowing the economic recovery.

Economists are expecting a combination of falling income and higher spending (due to increased costs of gas, etc) to drop savings in the current month, however the overall trend is an increase in personal savings rates.

The general drop in net worth, currently the lowest since 1992, is pushing up the savings rates. Currently, the net worth numbers align with savings rates somewhere between 6% and 10%.

Just how does this impact the economy?

Well a 6% savings rate equates to about $700 billion that doesn’t go into the economy. 10% would exclude $1.2 trillion.

Funny how things change, huh? I remember a time, not too long ago, when the topic used to be how pathetic the savings rates were.

So, I often listen to NPR whenever I’m in the car – and now that I take public transportation most everyday I download their podcast and listen to it while I’m on the T. Last Friday’s podcast contained a story by John Dimsdale titled, Foreign investors pulling out of U.S. Basically, foreign investment in US stocks is down 12% from last year – and that 12% is the most significant downward movement in recent history. While that may come across as not very important to someone that doesn’t have heavy investment in the stock market or a publicly traded company – it ends up being very important to someone that had a lot of credit debt and little savings.

Not all foreign investment is leaving. Foreign companies and sovereign wealth funds are taking stakes in private equity firms and other U.S. companies, but Global Insight economist Nigel Gault says the foreign flight from U.S. securities means in the future credit will be more expensive and Americans will have to rely increasingly on their savings.

Ouch – as if I needed more reason.

I may not make as much as Britney Spears does in a month – reportedly $737,000 – but by the time we’re both old and gray, I may be in better financial shape than my former, repeat former dream girl.

It seems like a long time ago – and it probably was – when I decided to suspend my ROTH IRA contributions in order to focus on eliminating my debt.

But lately, while looking forward to the future, I’ve been thinking of the difference between a traditional and Roth IRA. More specifically, I’ve been wondering if when I re-start my contributions, will I still be in the right vehicle for me.

So in order to answer this question, I took a look at the difference between the two.

In a traditional IRA…

• The money you deposit is not taxed
• Besides the initial deposit – which is taxed – you minimize your taxable income through using a traditional IRA
• Earnings on your contributions are not taxed until withdrawn
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions
• You are taxed upon withdrawal

In a Roth IRA…

• Contributions are not deductible
• Earnings on your contributions are NEVER taxed
• Roth IRA offers tax-exempt earnings, not just taxed-deferred
• A traditional IRA taxes you on your gains once you make the withdrawal. The Roth never taxes you again post-contribution
• Any withdrawals before you turn 59 1/2 are subject to a 10% early withdrawal penalty
• Unless used for qualified exceptions

So, it basically comes down to tax me now or tax me later. This is where some information about tax brackets might come in handy…

Courtesy of 360financialliteracy.org

Generally, a tax bracket is the income tax rate at which you are taxed for a certain range of income. The income ranges vary, depending on your filing status: single, married filing jointly (or qualifying widow(er)), married filing separately, or head of household. Brackets are expressed by their marginal tax rate, which refers to the rate at which your next dollar of income will be taxed. There are six marginal tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, and 35 percent.

Year 2004 federal income tax rates for single taxpayers are as follows:

If Taxable Income Is:	Your Tax Is:
Not over $7,150	10% of taxable income
Over $7,150, but not over $29,050	$715 + 15% of excess over $7,150
Over $29,050, but not over $70,350	$4,000 + 25% of excess over $29,050
Over $70,350, but not over $146,750	$14,325 + 28% of excess over $70,350
Over $146,750, but not over $319,100	$35,717 + 33% of excess over $146,750
Over $319,100	$92,592.50 + 35% of excess over $319,100

So…to me (and again I could be wrong – please comment and correct me if I am) it seems that the more money you have, the more you can be taxed.

Therefore, wouldn’t it make sense to have your money grow tax-exempt so that your taxes are taken out at a bracket used for a person of lessor income, rather then later in life when you may actually be worth something…you know…in the financial sense?

Bottom line, I’m happy with my Roth.

Relevant Link: Kiplinger.com – Ride a Roth to Riches

Is it good software?

Sure.

Could it help someone trying to create a budget and allocate their money?

Absolutely.

Is it for me?

Not really.

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Nothing against Mvelopes or their format, but I just don’t think I’m going to be going on past the free trial. It’s just an extra step and I think could be more useful to help a family or at least a young couple with their budgeting. Since it would be helpful to have one place that lists how much money is left in a specific envelope without always having to have “a talk” with someone.

But I’m a young guy – basically just starting out – and I think my duel-bank account system is going to be more effective for me, since it will practically run itself.

Then, once my day-job begins to pay slightly more (and there have been some great personal/career developments lately – so hopefully it’s only a matter of time). I will split my direct deposit so that I can continue my two bank system and let my money take care of me.