People of America, listen to your president!
Yes, gas prices may be down to nearly $2 a gallon, and yes, AAA is projecting that the average American family could save about $550 a year if things continue that way. But remember the fundamental rule of consumer prices: What goes down must go up.
“Just demographics tell us demand is going to continue to grow, that over the long term it will grow faster than supply and we have to be smart about our energy policy,” President Barack Obama told The Detroit News last week. “If you go back to old habits and suddenly gas is back at $3.50, you are going to not be real happy.”
In other words, sock away the extra dough, but don’t expect it to last forever.
If you don’t believe your president, then listen to Mary Hunt, founder of the website debtproofliving.com and author of seven budgeting and financial planning books, including “The Financially Confident Woman.”
“I just don’t believe gas prices are going to stay low forever,” Hunt says.
Her suggestion is to establish a fuel hedge account where you bank your temporary gas savings to create a buffer when rising prices go back up.
“You have to think like a business,” Hunt says. “My vehicle has a 24-gallon tank. Therefore a fill-up means I have not spent $48 I would have had to spend six months ago, and it’s not like if gas prices hadn’t dropped I wouldn’t still be paying the extra $48. Smart people say to themselves, ‘I need to tell that $48 where to go,’ and don’t just let it evaporate.”
That means if you now budget $200 a month for gas, you keep taking that much out of your paychecks, so that money will still be there when gas prices bounce back up. Hunt suggests sending the money to a dedicated savings account, partly so you don’t just fritter it away, but also so that your big savings don’t end up doing big damage to your family budget.
If you just let the extra cash slosh around in your checking account, you get an inflated sense of your temporarily increased wealth and start spending recklessly, whipping out the debit card for an extra latte here or a lunch out there that quickly adds up to much more than what you’re saving on gas.
“It’s little things,” Hunt says. “You go to Starbucks and instead of mommy just getting coffee, now all the kids get a treat. Or you order dessert when you go out. And then, instead of us telling our money where to go, it’s telling us where to go, and everybody is in big trouble for not having an eye on the future.”
Beyond setting that money aside, you need to assign it a job. If you don’t have an emergency fund, that should be Job No. 1, and this is a great opportunity to start or add to it. Beyond that, if paying off debt is a priority, decide which debt to tackle first. Some experts advise paying down your highest-interest debt first, while others encourage you to target your smallest accounts, so that you get the sense of accomplishment that comes from getting the balance down to $0.00.
Lindsey Burgess, marketing director of the budgeting and money-tracking site You Need A Budget, advocates using the money to build a one-month cushion for all your monthly costs.
“We advocate toward living off of last month’s paycheck, which takes time,” Burgess says. “For some people, that takes a year. Depending on how high your budget is for fuel, this is the kind of moment where you can really get ahead.”
By building a one-month cash reserve, you can go from worrying about when to pay which bill to simply paying your bills as they come in.
“That’s where you’re going to feel the most reward,” Burgess says. “The beauty of a budget is you don’t have to stress. The bills come in and you don’t have to worry about how you’re going to pay them.”
Adjusted for inflation, the wonderfully low gas prices now are equal to what we were paying at the pump nearly 10 years ago. But, since then average U.S. prices have soared to more than $4 a gallon. The expected temporary boon now also argues against making any other long-term spending decisions, such as buying a new car or truck that offers low fuel efficiency. When prices go up, you’ll lose what you’re saving now and more to fill up a thirstier vehicle.
“It would be tempting to just fritter it away,” Burgess says, “but the opportunity to get ahead is where it’s most exciting.”
Instead, use the temporary savings from low gas prices to give yourself a permanently improved financial situation.
Or, as the president put it, “Folks should enjoy.”
Where to save
Rather than leave the spare dollars from lower gas prices rattling around in your checking account, divert the money to a dedicated savings account, advises Mary Hunt, creator of www. debtproofliving.com. She recommends saving your extra gas money to an online savings account you can link to your checking account. Online accounts typically pay somewhat higher interest. While there are several, Hunt recommends these two:
CapitalOne360: Now pays a variable rate of 0.75 percent on savings accounts. Allows unlimited sub-accounts so you can designate some money for a vacation, some for a new car, or any other purpose.
■Online at www.capitalone360.com
SmartyPig: Now paying 1 percent on savings accounts and offers unlimited sub-accounts, savings-goals calculators and tools.
■Online at www.smartypig.com
How to save
The Web is chock full of different budgeting sites, but one of the most straight-forward is You Need A Budget. The site focuses on looking ahead to allocate your current cash and next paycheck to cover immediate bills, while using any remaining money to build reserve accounts for annual expenses and savings goals. YNAB encourages a strategy of building a one- to two-month reserve to cover your bills and smooth out weekly cash flow.
■Online at www.youneedabudget.com
Brian J. O’Connor