How to Save Money

J. George Frederick

HALDEMAN-JULIUS COMPANY
GIRARD, KANSAS

Copyright, 1926,
Haldeman-Julius Company

PRINTED IN THE UNITED STATES OF AMERICA

The whole round world is gradually becoming economically literate and self-reliant, because sound ideas of economic foresight are everywhere being spread. The U. S. Ambassador to Spain reports, for instance, that the “mañana” spirit (“put it off until tomorrow”), which has been one of the time-honored economic hindrances in Spain and Spanish-American territory, is now disappearing.

The principle of saving is pre-human; it is a biologic inheritance from our ancestry, for a squirrel, an ant and bee are models of saving wisdom. A human being, with his greater brain capacity and richer store of folk-lore and racial memory, should be the most invariably forehanded of all the creatures of earth. He is not, however. Economic literacy has not been present, and is not today present, in many, many millions of people. They display a laxity and a blindness to the hard facts of the struggle for existence which no one of many lower creatures than man ever displays. The possession of a human brain has not seemed to lift such humans up to the coordinative previsioning level of adjustment to environment which is displayed even by some of the very lowest order of living things. Even a jelly fish is a primeval kind of savings bank.

But world-wide concentration on economic well-being, world-wide [Pg 6] inter-communication of ideas, and consequent increase in variety of desires, are now beginning to tell, even in countries in the Orient where religious and philosophic ideas have repressed the economic urge toward accumulation. The deeper economic class-consciousness of labor everywhere has been another vital factor, particularly in America, where labor concentrates more on economic welfare than on political action.

In America, however, the ordinary man’s concentration on his financial welfare has as a rule been mainly toward earning more and spending more, rather than on saving more. Individual for individual, the French peasant is a far more saving person than the American farmer, for the typical American farmer usually puts his profits into additional equipment, more land, more education for his children, more comforts for his family. The result is that he is rather habitually in an inflated financial condition, and has not the cash or security accumulations of the French peasant.

The American workman, too, has been increasing his standards of living as fast as his earning power has risen, and since 1925 has been drawing close to inflation also, through the dubious device of the instalment plan. At the same time, it is true that he has never had more money in the savings bank nor more investments and insurance in force. He is saving more, but by no means in sound proportion to his earning power.

In view, therefore, of the incontrovertible facts uncovered by insurance companies, that the great majority of men at 65 years of age [Pg 7] are dependents, it seems that one of the great needs of the century in America is that the idea and the precise methods of systematic saving be spread broadcast and thus become more universally practiced. All the more imperative does this need become in view of the additional fact that we are rapidly lengthening the average span of life. In the year 1500 the average man had an expectation of only 25 years to live. This seems incredible, until you know how men lived in those days even in London—in huts with earthen floors covered with filthy rushes; eating bark, peas, and roots, and possessing neither cotton nor woolen clothing, only ragged dirty leather, never removed, and mere straw whisps tied to the body if poor. As late as 1880 the expectation of life in America was 45 years. Today it has risen to 58, and is still rising. Consequently we have more years of old age to provide for than even our grandfathers and fathers. This is an extremely, important consideration. So is the fact of our constantly rising standard of living, which makes yesterday’s plenty seem scanty tomorrow; yesterday’s adequate saving tomorrow’s inadequate provision. So also is the increasing delay before young men and women become earners and can marry; so also the increased demands of modern life for educating the young—demands which drain the parental purse in a manner not known in former generations.

Saving, as an economic science for the individual, is thus looming as particularly important for every person, young or old, male or female. [Pg 8] The modern economic independence of woman has made saving woman’s problem as well as man’s. The subject is one which should be studied even by young people, and in fact should be taught in schools. It has a far more potent relation to individual and marital happiness and general social well-being than it is generally credited with in a land where lavishness and free spending are the order of the day, and where there prevails a timid fear of being regarded as “tight.”

In a significant manner this is illustrated by the fun poked at President Coolidge for his thrift, which, derived from an older and sterner Yankee standard, is now a somewhat neglected and half-despised virtue.

To summarize, there are seven powerful modern reasons for training for saving:

• (1) The acquirement of personal dignity, welfare and
• self-respect in an economic world.
• (2) The ability to marry and start a family without
• delay at the mating period.
• (3) The ability to attain the special security and
• satisfaction of an owned home.
• (4) The ability to fund the adequate education of
• children to enable them to meet the competition of
• modern life.
• (5) The ability to engage in business or other
• enterprise which fits one’s faculties and
• ambitions.
• (6) The ability to provide for the exigencies of our
• lengthened old age.
• (7) The ability to bequeath, at death, to those
• dependent on us.

The absolutely primary requirement for systematic saving is the will to save—not a mere momentary impulse to save, not a mere general desire to save, but the effective establishment of a fixed, disciplined habit of saving.

Success in anything is quite largely a matter of will-power, and bromidic as the advice may seem, the man or woman who cannot stiffen his spine and set his jaw with sufficient resolution to say “I will save” lacks the essentials for overcoming those obstacles which lie in the pathway of everyone striving for any purpose or ambition.

Anyone in the income level above bare necessity who is not sufficiently interested in his or her own welfare to lay by a certain portion of earnings for the future either is irresponsible mentally or does not care what bitterness the future may bring. The creation of habit is a mechanical process. There is no mystery about it. William James has described it in detail. The human mind responds splendidly to a sincere habit-creating determination. The first result is something like a [Pg 10] hurt. It is like the cut of a knife in living tissue. That is why people shrink from habit-forming, unless it be habits simply following the line of animal pleasure. Each time the discipline is applied, however, the pain is less, and the human organism soon adopts itself to the new habit, and even learns to change the pain to pleasure. It is later painful to break the habit.

The saving habit, the saving thought, the saving will are the keys to successful saving, and, in the measure that these are achieved, to that degree will there be success in saving. The most typical situation in regard to saving is an occasional realization that saving should be accomplished, and a sincere effort is often then made. But within a few weeks, or a few months, or a few years, according to the strength of character of the individual, the impulse, because it is not disciplined and forged into a fixed habit, is lost, overwhelmed by stronger habits and impulses.

The truth is, of course, that the will is not master of us at all times, and in fact at few times. The findings of modern psychology indicate how much we are creatures of instinct and emotion. [Pg 11] The grave error as to saving which most people make is the failure to hitch the saving idea to a really powerful instinct or emotion. It is true that Acquisition, Economy and Accumulation are authentically listed among the human instincts. But there are so many other instincts which in a prosperous country like ours dull and diminish the accumulation instinct, that there is a losing fight put up by the saving instinct. For instance, among the other human instincts are Rivalry, Curiosity, Family Affection, Sex Love, Ego, Display, Construction, Imitation, Play, Pugnacity, Social Cooperation, Leadership, Pride, Hospitality, Sympathy. These instincts are constantly breaking down the Economy and Accumulation instincts, except insofar as they cater to the satisfaction of these other instincts. Thus we have millions of people in America who work hard and earn a great deal of money, but who are also the most prodigious spenders in the world. They are not great savers.

Psychologically, what has happened is that, like our sense of smell, our sense of accumulation and economy is blunted by disuse. It is always in a country where living conditions are hard that the instinct of accumulation and economy sharpens and develops. The Scotch [Pg 12] and the New Englander (both living in stony countries) have developed these qualities to a point where it is part of their tradition. The old joke about the Scotchman’s purse, out of which, when he opened it, flew a moth, is one of hundreds of similar jokes. President Coolidge, as embodying the New England Yankee tradition of “closeness,” has the authentic tradition of Yankee thrift behind him, based also upon the hard-won accumulations of our Puritan ancestors.

Disuse of an instinct relaxes and rusts it, and in the last twenty years this has occurred to large numbers of Americans. The savage who lives in a land of luxury soon dulls his hunting instinct and his marksmanship; and if he suddenly is again thrust into hard conditions he dies. Whole tribes and even whole races of men have disappeared, for probably no other reason than that of living in soft luxury until a natural cataclysm put them up against conditions of which they were once masters, but had lost the power to conquer.

The instinct to accumulate is basic and should not be permitted to atrophy in any human being. The span of life inevitably brings most of us at some period to a point where we suffer if we do let it atrophy. (Naturally, of course, it should not be permitted to become abnormal or obsessing, either.) [Pg 13]

How shall this atrophy be prevented, psychologically? It is best accomplished by routing all instincts over the “long circuit” in the mind; that is, subjecting all of them to review before the tribunal of reason. Most instincts are permitted to travel over the “short circuit” of the mind; that is, the feeling is permitted to arise and flow into expression and action before there is any attempt at correlation of ideas or the use of judgment. The ideal that made the Greeks the most balanced super-humans of all history was undoubtedly their dictum “of nothing too much.” This required long circuit mental processes; a brake of reason upon the crude excrescences of instinct and emotion. As Christopher Morley says in Thunder on the Left, if hunger can keep from taking the food within its reach, then is the life of the spirit begun. Also, then, is the saving instinct preserved in the modern welter of plenty; together with the fine character balance which is represented by “thought for the morrow.”

It should be pointed out also that decision plays a vital part in saving. Psychologically speaking, decision (in the words of Prof. H. L. Hollingsworth, of Columbia), is “only another name for the final [Pg 14] outcome of the rivalry of competing ideas or instincts.” Thus we see how important it is that the rivalry against the saving idea be not made unfair and disastrous, by opposing against it Display, Imitation, Hospitality, Ego, Rivalry, Ostentation, Curiosity, Envy, Jealousy and other instincts which break any decision to save. The instincts which aid the saving instinct are Love of Family and Home, Construction, Social Cooperation, Leadership, Civic and National Pride, Self-Dependence, Sex Love. Many a young man never saves a penny until he meets a nice girl he wants to marry; or until he gets tired of wandering and develops a desire for a fireside.

Theory or optimism is one thing regarding saving and its vital place in human economy—but the cold, hard facts, checked after the funeral is over, are quite other things. Even in a land of comparative plenty like America the baring of the secret closets of life indicates how men and women live and die in relation to financial dependence or independence.

The American Bankers’ Association made an analysis some few years ago [Pg 15] as regards 100 average men, which rips the doors open. The average situation at various ages, for men only, is as follows:

• Age 25
• 100 Average men, healthy and vigorous in mind and
• body and dependent upon their own exertions
• for their support.
• Age 35
•   5 have died
• 10 have become rich
• 10 are in good circumstances
• 40 are in moderate circumstances
• 35 have not improved their condition
• Age 45
• 11 more have died, 16 in all
•   4 only are rich, all the others rated at age 35
• as having resources having lost their accumulation
• 65 are still working, and are self-supporting,
• but without other resources
• 15 are no longer self-supporting owing to illness,
• accident, etc., a few still earning something
• but not enough for self-support
• Age 55
•   4 more have died, 20 in all
•   1 has become very rich
•   3 are in good circumstances, but not the same
•   3 quoted at age 45, for one who was rich at
• 45 has lost everything, and another not
• rated rich at 45 has taken his place
• 46 still are working for their living, without
• any accumulation
• 30 are now more or less dependent upon their
• relations or upon charity for support; some
• still able to do light work are being replaced
• by younger men
• Age 65
• 16 more have died, making 36 in all out of 100
•   1 is still wealthy
•   3 are rich, 1 of those who lost everything before
• 45 having again become rich
•   6 still at work; self-supporting
• 54 are dependent upon children, relations or charity [Pg 16]
• Age 75
• 27 more have died, making 63 in all, 60 of
• whom left no estate
•   2 only are rich, three who were rated as rich
• at 65 have lost their accumulation
• 35 are dependent upon children, relatives or
• charity. These old men will die off rapidly,
• but their financial condition will not improve,
• and 33 of them will not have sufficient means
• to defray funeral expenses unless insured

Nowadays we realize as never before the great importance of bending the sapling as we want the tree to grow; when we know that even very young children are greatly susceptible to special training. Therefore start teaching children saving at the age of 3 or 4 years.

Get them a savings bank, of interesting shape and kind, and provide them with special saving incentives, such as the purchase of a particular toy, or for Christmas presents, etc. But to be effective such training must see to it that the child is given the reward for which he is saving about every 30 days. If it is delayed too long the child loses interest. It is also important to have the child earn the money it saves by some services over and above its normal duties.

Children, once they go to school, can connect with school savings banks, or special savings plans operated by banks or other institutions. But a child should always be in process of saving, [Pg 17] and should be put on an allowance as soon as it goes to school, and be trained to keep an account book. This is not only fun if handled in the right way, but business education.

It should be a principle rigidly observed with children all the way to maturity, that no wish of theirs for anything valuable is granted unless they go through a period of expectancy and saving for it.

Lavish giving of presents, even of toys, destroys valuable qualities in children, or hinders their development. Even rich parents are nowadays paying far closer attention to these things, as they realize that riches can unfairly ruin the young before they can become mature. Rich, spoiled young men are to be pitied rather than envied. The tendency of parents is to earn and save in order to lavish money on their children; whereas if they really love their children they will inculcate the will to save and the self-reliance which they themselves have attained.

It is hard for many people to grasp the fact that money is a wage earner, like themselves. Money saved is like having a helper to decrease your working burden. It can be planned so that it finally [Pg 18] can take over your “job” and earn as much as you do. Then you will not have to work at all to live, unless you wish to do so.

Money is not something to hide in a hole in the ground or put in a miser’s secret bag to gloat over. It is something to dress in overalls and send out to do its normal day’s work for you.

Despite the time and attention the potential saver may give to accumulating money, if he does not know how to invest it wisely and safely his time has gone for naught. Money depreciates far faster than it accumulates, and it is of the utmost importance that the saver devote as much care to finding a way to invest his money as he does to accumulating it.

Adult investment-saving should commence at twenty years of age if possible. If the investor has missed his chance of commencing he should begin “as soon as possible.” It is never too late to begin, as the handicap of tardiness may be overcome by the sure, swift work of compound interest.

The important accumulations of capital by some of our most prominent rich men have not been the result of chance, accident, speculation nor even hard work solely on the part of the individual. The hard work has [Pg 19] been at the instance of their initial accumulation, which has been made to move early and efficiently. When money works systematically it knows neither the dinner-gong nor bedtime. This is not a rosy dream—money cannot, of course, make everyone affluent—but the earning power of invested savings is a sound business principle. If it were not for invested capital, modern business could not exist.

It is impossible to save systematically unless expenditures are made under some form of control, and on a basis of sound apportionment. This is the method known as the budget system, first applied to government expenditures with success, and now widely applied in business, in household and in personal expenditures.

The budget has aptly been termed “a plan of spending money in advance of actual disbursement.” The most approved budget divides or apportions the salary or income according to six divisions—Shelter, Food, Clothing, Operating, Savings and Advancement. These standard divisions are based on the needs of every individual and every family. The budget depends on the amount of income, and on the prices of products. It is [Pg 20] also determined to a large extent by the following factors: (1) the aim and standards of the family; (2) the number of individuals in the family, and their ages; (3) the location, or residence, whether city, small town or country; (4) the occupation of the wage-earner.

Two general principles are involved in working out budgets. The smaller the income, or the more children per income, the greater the percentage of it you will have to spend on the three necessities—Shelter, Food and Clothing. Again, the larger the income, the larger the percentage which may be spent on the last three divisions—Operating, Savings and Advancement. People with incomes around forty or fifty dollars a week, can spend only about five percent, for Advancement, while those who have incomes around sixty dollars and over a week can give from fifteen to twenty percent to Advancement or to any of those interests which can be classed broadly as “higher life.”

A workable, successful budget can only be made by keeping a record of previous expenditures. Keeping accounts in detail is advisable in order to furnish a basis for future and better-planned budget spending. Buy a [Pg 21] blank book ruled with about twenty-five columns. Give one column to each particular item, such as Groceries or Milk, and arrange these under a main heading, in this case Food. Write down the amount you spend for each item on its proper date. At the end of each week add up your accounts and compare them, with the ideal budget given on this chart for your particular income and family.

The following are the budget figures carefully worked out by Mrs. Christine Frederick, author of “Household Engineering,” and founder of Applecroft Home Experiment Station, Greenlawn, Long Island. They are concretely figured in dollars and cents for various sizes of families and various incomes,

Definitions of the standard budget divisions will help to clear up some questions:

Shelter covers the rent of your house or room. If the house is owned, then the total yearly expenses of taxes, insurance, repairs and general upkeep should be divided by twelve, and this estimate set down for each [Pg 24] month. If farm or parsonage is free, nevertheless such value should be estimated and included. Shelter also covers carfare or transportation to both work and school. In the case of some rented apartments and houses it also covers coal or heat, in which case this amount is deducted from the division entitled Operating.

Food covers the cost of food materials and products used in the preparation of meals, also board and meals eaten away from home.

Clothing covers the cost of ready-to-wear garments of every type. It covers the cost of materials and supplies for making clothing at home, the expense of a dressmaker or tailor, cleaning, repair and pressing.

Operating covers the cost of fuel, light, telephone and ice. It also covers the expense of a maid, laundress, or laundry and its supplies. It includes any service paid for by the hour, day or month; the cost of furnishings, and labor-saving or other household appliances, their repair or replacement.

Savings covers all payments on property; on all kinds of life and beneficiary insurance; on bank savings deposits, stocks, bonds and other legitimate investments. [Pg 25]

Advancement covers sanitation, health and toilet articles, doctor and dentist expense. It also covers educational expense, and items of amusement and recreation, such as books, periodicals, music, the theater, vacation and travel. This division covers also such miscellaneous items as clubs, charity, organization dues and the like.

The greatest mistake of the American saver is to invest unwisely. It is estimated that over three billion dollars have been unwisely invested in fake or questionable oil stocks alone in recent years. Despite precautions, a billion dollars a year is at present dissipated in “cat and dog,” or worthless, stocks.

The reason is that the American is an inveterate chance-taker. He carries this principle with him in handling his investments, and does not realize that it has little place there. Investment for the ordinary man should be Grade A and Grade B and C risks exclusively; never grades D, E, F or greater risks. A Grade C investment is quite “chancy” enough; a Grade B is more reasonable. Grade A is safe. Naturally the yield is lower on Grade A investments, but sometimes there is no yield at all on lower grades! [Pg 26]

Contrary to general belief it is not necessary to put off the pleasure of being an investor indefinitely for lack of a large surplus.

The greatest fortunes have been founded on a steady and consistent accumulation of capital, starting with extremely small sums. Much larger sums than it took to start these large fortunes have been lost by individuals endeavoring to get rich too quickly.

Any sum is a start—even a dollar. There are now many banks which will gladly open a savings account with one dollar. It is not the amount but the systematic method that counts. The savings bank is the natural first field of action for savings—especially on a regular deposit plan. It is only when the sum gets to $500 or $1000 that “investment” of a different kind should be considered—and then it should be government bonds. The saver should write a letter to his banker or broker, and enclose an order to buy “at the market” government bonds (any issue) for the sum he has ready to invest. The saver cannot go wrong if he does this.

The following might be regarded as a general schedule of instructions for savings investment, based on the amount of total available savings:

Liberty Bonds and Victory Notes have the highest investment rating in the world of finance; they are more gilt-edged than any other bonds ever issued by nations or corporations; they even come ahead of British Consuls and French Rentees, which, prior to the World War, ranked foremost among investments. The owner can always borrow on U. S. Government Bonds, if borrowing becomes necessary. [Pg 28]

Among all the securities one could buy none rank so high nor are so convenient from the point of view of marketability, ease of liquidating, and collateral value as good bonds. One need seldom take a loss in good bonds through forced selling. There is little fluctuation.

It is better to hold gilt-edged bonds, the kind banks lend money on. These usually consist of U. S. Government bonds or a certain class of high-grade corporation and railroad issues that have been passed on by the savings banks. Others are so highly rated as to be eligible for trust funds, and a medium for the conversion of inheritance funds, insurance funds and the like. You can buy short-term issues if the money may be needed in a few months or a year or two; otherwise select long-term bonds. Then hold them and continue to do so. When you need money borrow on them, even to buy other sound securities like gilt-edged preferred stocks and the best-rated common stocks. You need never part with your original investment in bonds if you follow this suggestion.

Securities in general may be rated in their order of investment merit as follows:

• Bonds
• A. “Gilt-Edge” bonds
• B. High-grade bonds
• C. Medium-grade bonds [Pg 29]
• Stocks
• A. High-Grade preferred stocks
• B. Medium-grade preferred stocks
• C. Speculative preferred stocks
• B. High-grade common stocks
• C. Medium-grade common stocks
• D to Z Speculations

The shrewd buyer will always discover some bargains if he will do his shopping on the common-sense principle that it does not pay to wait until everybody wants the same goods at the same time. The saver will do well to sharpen his own knowledge of investments.

He should pick up his bargains in the off-season, place them in “cold-storage” and only lighten his load when everybody wants them at once, at any price, and for immediate delivery. There is no better way of determining when the bargain season is on than by watching the daily newspapers. Never buy preferred or common stocks when business is in a period of inflation or at a peak of prosperity. The time to buy is when conditions are at a lower ebb, when the stocks of absolutely sound companies are selling cheaply. It is good advice to buy only stocks listed on the New York Stock Exchange—the list of which is printed and quoted every day in leading newspapers.

Bonds often go up when stocks go down. As a general proposition any [Pg 30] bond which is a direct mortgage, on property valued largely in excess of the bond issue—where the issuing corporation has shown its ability to meet interest charges, year in and year out, by a large and ample margin—is a good bond.

It is difficult, however, for the average business man to investigate the value of the underlying securities, to judge them even after lengthy study, or to decide whether a particular mortgage is “clear-cut,” without reference to mortgages preceding or following it.

Also, no ordinary man is competent to pass upon the legality of an issue or the titles back of a mortgage. This requires a complete battery of specialized talent, especially in the case of corporation and railroad bonds. Such information is always on hand with your banker or broker, and if you ask his advice he will always be glad to assist you.

It is well to rely upon the banker who makes a business of investments—but he should be a conservative banker of good repute. Always, without fail, investigate your banker. Be suspicious of lurid advertising and follow-up. As a general rule the higher the interest yield the more risk the investor takes. Don’t be greedy; be content with moderate return and safety.

There are now a number of companies formed to purchase first mortgages on new buildings, apartments, etc., and resell them to the small investor for a series of payments. They specialize on first mortgage bonds. It is a good method, but be sure of your company. In order to define a first mortgage bond it is necessary first to explain what a first mortgage is.

A mortgage is a legal paper covering a pledge of real-estate holdings given by a borrower of money to a lender. The mortgage is held either by the lender of the money or by a third party, known as the trustee. Any mortgage represents the promise to pay a stated amount at a specified time, at a legal rate of interest, and it transfers title to the mortgaged property only in case the money for which the security is given is not repaid. A first mortgage, therefore, is any mortgage filed of record which precedes all other claims in the event the property has to be sold to pay the holders of the mortgage or other creditors.

As has been stated above, every first mortgage bond is a direct first lien on the property securing the issue. The importance of this [Pg 32] fundamental factor in investment safety would seem to be self-evident, but it is a fact that the investment market is flooded today with a vast number of securities, many of them regarded as conservative, which do not even represent a legal obligation to pay, and which are entirely dependent upon the prosperity of the issuing corporation for their payment. The term “bond” is often a misnomer, the so-called bond being merely a chance to share in profits, if there are any. It is no different from a stock; they are debenture bonds, not secured bonds. They should be very carefully scrutinized.

Although bonds are usually issued in one thousand dollar blocks, of late years many corporations have split their bonds up into “baby bonds,” or bonds of one hundred dollar value, in order to gain the participation of the small investor and saver.

For example, among the high-grade (A) “baby bonds” for income only, the author would recommend to the prospective investor such issues as the following: Atlantic & Danville, 1st 4s, 1948; Bush Terminal Buildings, 5s, 1960; Western Union Telegraph Co., 6½s, 1936, and Armour and Co. of Del., 1st 5½s, 1943. [Pg 33]

In the middle-grade (B) list for income and profit there are Cuba RR, 1st 5s, 1952; Western Pacific, 1st 5s, 1946; New York, Ontario and Western, 1st 4s, 1992, and Kansas City Southern Refunding and Improvement, 5s, 1950.

Among the more speculative (C) bonds for income and profit, also in the “baby bond” class, come the Erie General Lien, 4s, 1996; Chicago Great Western, 1st 4s, 1959, and Chicago, Milwaukee and St. Paul Convertible, 5s, 2014.

The writer urges that thought be given to this and similar bond lists so that the student investor may become familiar with the yield he can expect from most types. A study of the figures at which these bonds are selling, together with the figures of their yield, etc., will indicate what is meant by a “high-grade” bond and a “medium-grade” bond.

What might be called an acid test of the reliability of a bond is a satisfactory answer to the following questions:

Here is an unusually good saving plan—a form of investment that has the triple advantage of furnishing (1) good dividend-earning security, (2) possibility of material increase, and (3) fixed obligation to pay on certain due dates, which acts as a disciplinary saving system.

The difference between a preferred and a common stock is that the interest charges on the former, while not guaranteed, will be paid at the named rate before the common issue can secure any part of the profits. The only disadvantage is that a dividend on a preferred stock is limited to a stated amount, while over a period of years the common stockholders of a sound company may expect not only to get a rise in [Pg 35] dividends rate, but possibly also stock dividends or “split-ups,” and also a general increase in quoted value. There are economists today who contend that the soundest, surest way to let your money’s value grow with the country is to invest in the common stocks of very sound concerns, the leaders in their field.

It is true there is always an element of speculation in buying common or preferred stocks, and a good deal of shrewd discrimination is desirable in purchasing either preferred or common stocks. It is best to deal only in stocks listed on the New York Stock Exchange, or the soundest local stocks.

As in good bonds, present earnings or recent happenings may often be ignored for the general purpose of making investment in a good preferred or common stock. Seasoned reliability over a period of time, over lean and fat periods of business, the ability of a corporation to earn and pay its preferred dividend, should be the only consideration influencing a purchase.

If, in addition, the corporation has only a moderate funded debt and the preferred issue is followed by a substantial common stock issue upon which dividends have been paid or are in prospect, the preferred [Pg 36] issue is entitled to the rating “high grade,” and the investor should buy it, if the yield is six per cent or over.

A very high or extraordinary yield on a preferred stock means either (a) that it has escaped the notice of the rank and file, such cases being rare but not impossible; or (b) its industry is speculative, as, for example, mining or oil.

The case of common stocks is more risky, and these should be bought on installments only if they represent a 20% portion of a diversified list which includes bonds or good preferred stocks. The common stock of some of our greatest corporations has been available to wise purchasers and saving investors at ridiculously low prices. Frank Munsey is reputed to have purchased U. S. Steel Common at about 33. Today it has advanced 100 points beyond that. In fact there was a period when it was considered worth little; it was contemptuously regarded as “water.” The same is true of Woolworth Five and Ten Cent Store common stock—and many others. Even a common stock which has heavy tangible assets behind it, like U. S. Rubber, has been as low as 28 within a year of the time that it reached 97. Common stocks of sound, well managed companies, [Pg 37] especially those whose trade-marks are familiar “household words,” well advertised, are a very good purchase for the saving man. This is being more and more appreciated, for stocks of famous companies are now owned by hundreds of thousands of ordinary investors and savers where once they were owned only by a few hundred people. The ordinary man today, the man with only $500 or less, can share in the success and profits of prominent business institutions, at precisely the same ratio as the large owners and wealthy men. There are 14,500,000 stockholders in corporations today; and dividend and interest disbursements in January, 1926, amounted to the huge total of 5½ billion dollars.

Good bankers and banks will gladly arrange for the purchase of listed high grade preferred and common stocks on time payments; and the regular arrival of payment dates will be an excellent prod to saving, just as insurance is such a popular prod already. Installment purchase of merchandise is on a very large scale today (about 10 billion dollars in 1925), and the time payments for perishable goods could far more wisely be used to buy investments, which do not depreciate, but actually yield interest, and if carefully picked grow in quoted price.

Two classes of savers make mistakes: (1) the saver who hoards his savings in hiding places and gets no interest, or who does not get savings bank interest on bank deposits; and (2) the savings bank saver with $1,000 or more who does not invest his funds in bonds or high class securities and thus secure 4½, 5, 5½, 6 or even 7% interest.

Interest rates are like wages; your money should earn the best wage for you that is possible; but, unlike wages, there is a limit to what you should expect to earn safely. Savings banks pay from 3 to 4½% interest—4½% saving bank interest is not universally available with safety, but is today by no means uncommon. Any savings bank operating under a state charter is safe. Beware of “private” banks; many of them are not sound.

Government bonds are better than savings bonds—they will yield from 4 to 5½%.

At 6% the high class mortgage bonds and preferred stocks come into view, and are as a rule entirely safe. You should have no reason to regret trying to get 6% for your money, if you are intelligent in your choice. [Pg 39]

Above 6% there are more chances. There are entirely sound purchases of high class preferred stocks to be made that will yield as much as 8%; but the ordinary saver should not trust himself to pick them. They require special knowledge and analysis, to avoid making serious errors. At certain depression periods sound preferred stocks that are quite remarkable bargains may be found, under competent guidance; listed stocks of successful companies whose earning record is good and whose yield at depression prices may be as high as 10% in rarer instances. Such stocks are the only true financial “bonanzas,” and may be shared by the medium sized investor and saver as well as the wealthy man.

Some of the foreign securities now offered are quite safe at 8 and even 8½% yield; and others absolutely safe at 7½%. Interest yields have had to rise in recent years; and particularly for foreign loans.

The investor and saver with less than $5,000 capital should entirely content himself with 4½ to 6%; the man with $10,000 with 6 to 7%, and the man with $20,000 or more may hope to have one-fifth of his savings earn 8% with safety. All this is based however on conservative, skilled counsel, which a good banker or investment house will gladly provide at [Pg 40] no charge other than the usual moderate commission on sales.

Greed for high interest rates has lost more money to savers than has ever been made by taking the risks involved.

The subject of how your savings will increase if you let them accumulate at interest is particularly interesting. There are many cases on record of people who have dropped out of sight, leaving a few hundred dollars on deposit in a savings account, and who found on their reappearance years later that the modest account, through the compounding of its interest, has grown to one of substantial proportions. The interest continued to be credited quarterly or semi-annually, and as it was added it also drew interest. In other words the interest was compounded at regular intervals. Money invested at 6%, and the interest allowed to stand, will double in about 12 years.

The tables on the next two pages are printed to show how money accumulates merely by being left at interest. [Pg 41]

Not all savings banks are conducted on the same basis. In New York and a few other states the only institutions which are permitted by law to call themselves “savings” banks are the mutual savings banks. There are more than six hundred of these, most of them being in the eastern states. They operate under very strict laws. Only the safest investments are legal for them.

Their funds must be put into such securities as United States bonds, city and state bonds, high grade first mortgages—investments in which there is practically no risk.

There are no stockholders—the depositors really own the bank. They receive the profits in the form of interest on their deposits. The bank is managed by trustees who receive no salaries. The profits are never spectacularly great because the investments must be “gilt-edged,” and such investments do not yield big returns. So the depositors in these banks usually get from four to four and one-half percent on their money.

However, this money is probably in as safe a place as could be found anywhere. There have been no failures of mutual savings banks in recent years. [Pg 44]

Other savings banks are not subject to the same legal requirements, and the depositors are not the owners of the banks. Moreover, what you regard as a “savings bank” may be a savings department of a regular commercial bank. Many of these banks are as solid as the Rock of Gibraltar. Some of them may not be. It depends on the integrity and ability of the management.

It is best to make inquiries about a bank before you deposit in it. Find out something about the men who control it. Read its reports and financial statements. Write to the state bank examiner, and so long as your money is in a bank, try to keep informed as to the bank’s condition.

Some savings banks are extremely modern and alert to stimulate savings. One such mutual institution flourishes in New York City, and has a large list of members or owners among the working people of the city. It has three principal methods of savings, called: (first) saving shares, and (second) installment shares, and (third) income shares.

Saving Shares.—The plan of saving shares appeals to those who are unwilling to be bound by any particular plan of saving, and prefer to [Pg 45] save as the impulse and the occasion arise. This plan, while similar to the usual savings plan, has the advantage of what is sometimes called the “Shareholder Agreement of Guaranty”—paying annual dividends of 4½%, credited quarterly or semi-annually and compounded if allowed to remain on deposit. By this plan amounts ranging from $1.00 to $5,000 may be deposited with the bank.

Withdrawing of either the whole or any part of the amount on deposit, together with all accrued dividends, may be made without notice during usual circumstances, though the banking law specifies that sixty days notice may be required in unusual cases.

Dividend earnings begin the first of the month following date of deposit, and no time is lost awaiting a dividend period. During the months of January and July deposits received before the tenth draw interest from the first of the month.

Installment Shares.—To those who prefer a definite plan of saving and are in a position to follow through systematic deposits of a definite amount the banks offer a plan ranging upward from the payment of $1 monthly, applying on the $100 shares. On ten shares—$1,000—he would make regular payments of $10 monthly until the completion of the [Pg 46] required payments, together with compounded interest, equaling the maturity value of the share for which he has obligated himself to pay. There are many variations of this plan, taking into consideration the amount of shares the depositor wishes to buy and the period of time in which he wishes to pay for them. This type of investment pays 6% annually and is credited and compounded quarterly or semi-annually.

These installment savings pay a higher rate of interest, in most cases amounting to 1½% more than the usual interest rate paid on savings deposited in the ordinary way. On the plan of $1 payable monthly, as applied to ten $100 shares, with compounded interest dividends, the shares reach maturity in about seven years. However, by occasional advances in payments the depositor can, of course, expedite maturity in less than six years.

Should the shareholder desire to withdraw his savings before maturity he may withdraw the entire amount, together with 90% of the accrued earnings.

On the monthly purchase plan of ten shares, if withdrawal is made prior to maturity the following interest dividends are paid: 4% per annum semi-annually compounded, if withdrawn within three years; 5% per annum [Pg 47] semi-annually compounded, if withdrawn after three years and prior to five years; 6% per annum simple interest, if withdrawn after five years and prior to maturity.

By this plan of saving the systematic depositor who follows a definite course of saving profits to a much greater degree than the person whose deposits are spasmodic and who in that way secures only the usual interest rates.

If the depositor is in arrears in his monthly payments on or before the fifth day of each month, his deposit doesn’t begin to earn interest until the first of the month following payment. It is advisable for shareholders to make payment of their installment on the first of each month thus obviating the hazards of delays in mail and also give the bank clerks sufficient time to make entries on the books prior to the fifth of the month.

Should the shareholder be confronted with the need to raise cash, he may borrow from the bank on his shares at the regular interest rate by putting up his shares as collateral security. He may borrow up to ninety percent of the amount of the shares subscribed for.

On the installment plan of payment for shares, when $100, the maturity value, is reached, the shares are automatically retired at full value, [Pg 48] and disposition may be made either by transfer to his savings share account or exchanged for income shares, whichever the owner prefers.

The installment saving share plan is open to any person of legal age, or to any group of persons of legal age who wish to combine their savings and purchase shares by this plan. In the case of minors, application may be made by any person of legal age, as trustee for the minor, or as trustee for another person not making personal application.

To the investor who prefers the returns from his investment payable in cash periodically, banks offer a class of Guaranteed Income Share Certificates. These certificates are issued in $100 or larger denominations and by the guaranty plan are guaranteed as to both principal and dividends, at the rate of 5½% annually. Interest dividends accrue from the date the certificates are issued and payments in cash are due on January and July 1st. The income shares under this class may be withdrawn as the holder desires, three years after issuance, upon sixty days’ written notice (though some banks do not insist upon this formality.) In times of unusual business conditions other legal provisos regulating the withdrawal of deposits are sometimes imposed. [Pg 49]

Those of a “gambling” turn of mind will not find Income Shares particularly appealing, as this type of investment appeals to the conservative investor who, first of all, wants a safe and definite income-producing investment. These shares are not given a listing on stock exchanges, as this type of security is bought with a view to holding for income, and not to be placed on the market for sale. This explains why there is no dealing in this type of securities, such as the listed stocks and bonds, and, consequently, no quick market for their sale. To offset this seeming disadvantage, the investor would do well to consider that they have a fixed value and are not subject to fluctuations suffered by listed securities on the daily market. What advantage is a quick sale, when the holder of the security has to sell at the bidder’s price? While, it is true, the non-speculative, conservative investor cannot expect to make unusually large gains in his principal, on the other hand, the advantages offered by the certainty that the principal and income will be collected in full at maturity greatly offset the allurements of speculative investments.

Modern insurance is one of the cheapest things a dollar will buy, [Pg 50] also one of the most systematic methods of saving. It is a social device, based on statistics, which distributes individual risk of death or poverty to all those insured. Also, an insurance policy is a liquid asset that has a substantial cash value after a few years. Is not an expense, since it sells for cost-plus, the latter representing a necessary expense, as regulated by law. Few businesses are nowadays so closely regulated in the public interest as insurance, for insurance companies are strictly controlled by detailed laws, and the person interested in saving assumes no risk when he buys insurance from a recognized company. All our nationally known companies are thoroughly reliable, their rates fair, and what they sell fairly well standardized and without “catches” or “jokers.”

Life insurance offers methods of saving for working people.

More insurance on this straight life plan is issued than on all other plans put together, and more purposes than are often considered by those outside insurance work. The young man dependent upon current earnings takes a straight life insurance on which he pays a yearly premium of a comparatively small sum, and on which no money is paid by the company except at his death, when his wife or whomever he assigns it to receives it all. [Pg 51]

There are those who believe it is the cheapest and best form of systematic saving there is. The insurance on this ordinary life policy will be paid in a single sum, or if you so direct it will be paid as an income, monthly, quarterly, half-yearly or yearly to your heirs or “beneficiary.” Women often know little about the value of a large sum of money, and they seldom know anything about investments. So if a policy is paid in a single sum there is great danger that the money will be lost through unwise investment or possibly through extravagance. There are ghouls who prey upon women who have just secured insurance money. But if the policy is paid in installments a steady income is supplied which cannot be lost.

The income may run during a term of years or throughout the entire lifetime of the beneficiary.

But that is only part of the protection of a straight life insurance policy. At slight additional cost you may have a provision in the policy under which, if you become totally and permanently disabled before you reach the age of sixty, a life-long monthly income, beginning immediately, and increasing fifty percent at the end of the first five disability years, and an additional fifty percent at the end [Pg 52] of the second five disability years, will be paid you; and in the future all deposit or premiums will be canceled. This gives protection against poverty from any physical disaster.

The parents who are concerned as to the cost of a college education for their boy or girl may take out a twenty-year endowment policy requiring an annual payment of a proportionately larger sum, the whole of the amount of the insurance being received at the end of twenty years.

An endowment policy is also an ideal policy for those desiring to save systematically and regularly so they may enjoy the fruits of their savings after they reach the age of sixty or sixty-five. For example, if a man of forty were to take this policy and choose sixty for the age for payment of the endowment sum and for the beginning of his life-long income he would make his premium deposit annually or quarterly as he might desire until he reached the sixty-year age. He would then receive a cash payment of the endowment sum, and beginning one month later would receive a monthly income as long as he lived. Such a policy participates in the annual distribution of the company’s surplus. This participation materially increases the endowment and insurance value if thus applied. [Pg 53]

These are but two examples of the many policies issued by the various companies. All policies issued by recognized companies are excellent investments. Those interested in saving would do well to talk over the possibilities of insurance as a saving medium with an insurance salesman, as they nowadays have well equipped services for advising individuals concerning their particular saving situation.

An interesting method of using insurance as a saving plan for specific children, is for a mother or father to insure himself or herself each time a child is born, for a specific sum—$1000, $2000 or upward. By the time the child is grown, the 20 year endowment policy will have run out and a sum be ready for a college education.

Within the last 15 or 20 years, employers of labor have gone a long distance in matters of employe well-being. One of the most notable steps is the making possible, by systematic methods, savings which the workers would never have accumulated if left to themselves. A responsible employer who operates a carefully worked out savings plan, is a wonderful aid to thrift and accumulation. It is simplicity itself [Pg 54] for an employer to set aside, with the consent of the employe, a certain weekly portion of earnings which will be held as a savings deposit. By this means the certainty of saving is greatly increased, because the thing works automatically, and since the employe doesn’t get the savings portion into his hands, there is no temptation to change the plan or divert the savings to other things.

Some of the largest and most benevolent corporations not only save the employe’s money, which is entrusted to them, and compound its interest, but go so far as to offer to add to workmen’s savings as an inducement. Thus, for instance, the Metropolitan Life Insurance Company deposits to the benefit of each clerk, an amount equal to one-half the deposits made in its “Staff Savings Fund” during the year.

The employe is permitted actually to earn what amounts to 50% interest on his own savings plus ordinary interest. Few men of wealth, even if owning remarkably productive businesses, could match such a return.

The United States Steel Corporation and many other large corporations have a method whereby employes are encouraged to own stock in the company. Over 60,000 of the 250,000 United States Steel Corporation employes are now stockholders. The plan operated is to give the worker [Pg 55] the privilege of paying for stock on a monthly instalment basis to be deducted from salary or wages. Employes receiving $1,250 or less wages per year may subscribe to one share, and others of higher wage are permitted to subscribe to larger numbers of shares. Like the Metropolitan Insurance Company, the United States Steel Corporation is benevolent enough to pay a premium to the saver. Those who keep for one year the shares of stock purchased receive a special bonus of $3 per share; those who keep them two years receive $4 per share; and so on up to the fifth year, for which the bonus is $7 per share. This bonus is in additional to all regular dividends.

Furthermore, employes in many companies have been privileged to purchase stock at prices below quotations on the stock exchange. Further security is given the employe who holds the stock longer than five years by arranging a special compensation; if the subscriber dies, is disabled, or is pensioned by the company, he is given his stock in full and still enjoys its various benefits. Perhaps the most startling instance of how an employe’s resolve to save brings him profit, is the instance of 12 United States Steel Corporation employes who bought stock in 1903 (both common and preferred)—at about the same time when [Pg 56] Mr. Munsey with all his wealth bought many thousands of steel shares. These twelve workers, who paid a total of $46,000 for their steel shares at that time, have now more than doubled their money, through the rise in value of the stock. In other words, they not only have their stock, but they have made a net speculative profit of $55,000, which is an average of about $4,800 profit per man, or about $230 per year per man, exclusive of dividends.

This sum represents interest on about $3,800; which is actually more than these workers earned in a year. To put it another way, these steel workers who purchased stock in their employer’s company, grew with the company and profited just as the rich investors in the corporation did, to the degree that they actually earned more money than the interest on their total year’s salary amounted to, each year for 21 years.

Let us take another example, that of the Proctor & Gamble Company, makers of Ivory soap. This company, which has become famous for its policy of guaranteeing employment to its workers, operates a plan permitting employes to purchase shares equal to or slightly exceeding wages or salary each year; the plan being to pay for it on 5% of wages [Pg 57] or salary. The company agrees to pay, during the first year, twice the amount of the savings, or 10%, and for each additional share up to the eleventh year, adds 1%, so that when the eleventh year arrives the employe actually achieves 20% return on his investment for 11 years. About 65% of the employes eligible for this plan have subscribed to it and are saving in a systematic way.

Employers also frequently operate special fund savings plans for vacation time or for Christmas time—sometimes also for home ownership. The merit of this plan is also its systematic and automatic method of operation. Workers invariably save more freely when given a chance to operate in this manner through their employers.

Of course employers also operate pension systems and benefit systems for employes who become ill or die, but that is outside the scope of this book.

Of late years interest has been shown in group insurance plans. This was first brought to public notice through the government group insurance plan for the war veterans. Insurance science became highly developed in the course of working out Uncle Sam’s war veteran problems, [Pg 58] and now employes of companies are given opportunities for insurance benefits on a new and unusual basis, which, because of the large number of risks at one time, affords various advantages such as, for instance, the elimination of medical examination.

Other than this, the payment for this insurance is by arrangement with the employer, who not only aids in paying for it through his own funds, but deducts systematically the cost of the insurance from the worker’s wages. The reduction in costs, both of sale and collection, afforded to the insurance company, permits it to offer greater benefit to the insured.

Some insurance companies call their plan a “Salary Savings Insurance” and the plan is obviously as much a savings plan as it is an insurance plan, since, like all insurance, this group insurance has a cash value. Various forms of this type of insurance are available. The employer, under some forms, designates the number of months over which payment is to be made, and the plan also provides for choice between payment in one sum; payment partly in one sum, and balance in installments or payment weekly over a period of a year or fifteen months. The following table, that of the Prudential Insurance Company, gives some idea of the [Pg 59] payments and the intervals of payment for each thousand dollars of group insurance and thus furnishes the basis of examining the workings of this insurance plan in detail:

Many employers add of their own accord $500 to $1000 worth of insurance and thus make a contribution to the total. [Pg 60]

The Salary Savings Insurance idea is being widely offered by insurance companies; and in fact some insurance companies have adopted it for their own employes. For instance the United States Federal and Guarantee Company has taken out a policy for its employes who have been in the company’s service continuously for two years and receive an annual salary of $780 or more. The cost to each eligible employe is 5 cents per month per $100 of insurance. The remainder of the premium is paid by the company and the amounts obtainable by employes range from $500 to $5000. No medical examination is required.

Many of these policies also carry with them certain specific clauses which, in the event of illness on the part of an employe makes it possible for the premiums to be waived by the company and a certain percentage of the face of the policy paid to the employe during the term of illness.

Also in the event of partial or total disability, a great many of the newer group insurance policies carry benefits of one kind or another, and pay to the employe, if totally disabled, a certain income for the balance of his or her life. Or, if temporarily disabled, a percentage of the policy is paid to the employe during the period of disability. [Pg 61]

There are, too, certain policies, in group insurance, which carry specific provisions for the benefit of a workman’s family in the event of his death by accident. That is, a double indemnity is paid to the dependents of the employe when his death occurs by accident.

All these methods of group insurance available to employes, serve several important purposes in savings. Not only is the savings idea kept consistently going, on a systematic and proportionate scale, but, in addition, many other benefits are available, not possible in merely saving in a savings bank. For instance, when the employe begins to save by the method of insurance, he immediately creates an estate of the face amount of the policy. He also, by making his first payment himself or through his employer, provides immediately for his dependents in the event his salary or wages should be discontinued through his own disability to earn a salary.

It is a perfectly logical calculation to analyze an individual’s capital value to himself, for an individual worker, with only his services to sell, is his own invested capital.

A man earning $6,000 a year is getting an income which amounts to 6% [Pg 62] interest on $100,000. Therefore it is entirely fair to say that such a man’s capital value to himself and his family is $100,000. If such a man realized this, he would undoubtedly take himself more seriously; and give his own finances the same careful analysis and attention that a business man does who has $100,000 invested in a business.

The savings a man makes out of his salary—which should be 10% at least—equals precisely what is the average business man’s hope for the rate of profit which his business will show. A corporation capitalized at $100,000 hopes and expects its statement at the end of a year to show 10% net profit, after taxes, interest, depreciation, etc.

The individual should have the same expectation for himself. He should not only regard himself as having failed in his business (as the corporation does, if it shows no profit at the end of a year), but he should also regard himself as having stood still if he has not advanced his capital value, which is another way of having raised his salary or income. It is a splendid stimulation to the saving idea to thus visualize oneself personally, as though he were a corporation, for incidentally such a procedure results in giving a man a certain pride in [Pg 63] his own financial analysis, about which by traditional negligence we have been rather careless. From 30 to 65 years, at a salary average of $250 a month, a man earns a grand total of $105,000. If one-tenth of this, as per the standard calculation, is saved, the total is $10,500, not counting interest. If put into a savings bank at only 4%, compounded, this saving would amount to over twice this sum or about $23,000. This total saving in 35 years, until the average age of slackening off in earning power, would produce an annual income at that time, at 6%, of $1,380. This sum, as can be seen, is quite enough to insure immunity from real hardships in old age.

Economists tell us that the value of the average life is $5,000. The value of the very young baby is $180 and a man at the age of 80 actually represents a liability of $1,400. At 20 the average value is $8,000, but by 50, this value has decreased to $5,800. This is on the authority of the Life Extension Institute and illustrates the inexorable and illuminating possibilities of measuring human life on a capital value scale.

The United States, at the present time, averages in wealth $3,000 per person, which is actually less than the average value of life. [Pg 64] The annual income of the people of the country is about $545 per person, or $2,180 per family of four. Nevertheless in 1924 the average income of 86% of all workers was less than $2,000 per annum, and only 1% of the population earns as much as $8,000 per year. If you want to figure your own capital value, simply figure out how much what you earn represents as 6% interest in capital value.

You can attain a larger capital value in three ways: (1) by increasing your income, (2) by saving and investing, (3) by an insurance plan.

If a man 20 years of age desires to be worth in capital $30,000 at age 65, he can take a $3,000 policy at a cost of $6.00 per month. At 22 years of age, he takes $3,000 more. At 24, $5,000 more; at 26 $5,000 more, and at 28, $5,000 more. This is a total insurance in force of $21,000. At 65 years of age he then has the face value of his policies, $21,000, plus dividends of $9,000 or a net total of $30,000. The total cost of all this, if this plan is followed at the right ages, is less than $50 a month.

Think of yourself in terms of capital value; capitalize your savings and save systematically. Trust the rest to the law of compound interest and the earning power of money judiciously invested, and your financial future is systematically taken care of.