It looks like families in the US are finally starting to save again. According to the Wall Street Journal household debt decreased for the first time since 1952! This in turn resulted in a rise in the savings rate. In the past few years the savings rate has actually been below zero at times. The savings rate had been declining since the 80’s when it was around 10%.
It’s expected that the savings rate will be 3-5% this year (Goldman Sachs predicts 6-10%).
Sounds good right?
More savings means families will have more in reserve in case of emergencies or layoffs. In fact, don’t most personal finance sites and authors preach about making sure you have enough in emergency savings and when possible to not use credit?
Here’s the irony:
As more Americans save production will decline as more companies reduce their inventories as demand drops. Companies need our dollars more than ever otherwise gross domestic product will fall further. I’m not saying to go out and spend though. Just a crazy irony.
I think this is why any new economic stimulus plan in 2009 will have to be creative and not just rely on giving out money in the hopes that we spend as was the case in ‘08.
I think that though it hurts the economy in the short run it’s a necessary correction that families are savings now. We’ve gone too long with the spend-what-you-can paradigm and it obviously wasn’t working. That thinking leads to bubbles that burst when the credit comes due.
What have you been doing? Do you find yourself saving more lately?
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{ 20 comments }
I really think that we should have a total economic makeover. We sort of got addicted to unrestrained growth and debt based consumer spending. Instead, we need to focus on habits that are better for individual finances, start exporting more again (although it could be technology and innovation) and accept that unrestrained growth, without an accompanying down cycle, is not natural. After all, part of our problem is that we keep trying to stimulate the economy at any cost.
Miranda’s last blog post..Build Up Savings or Pay Down Debt?
@ Miranda - A big problem is the economy turns political. Recessions and growth are natural business cycles but no politician wants to say a recession is normal and have one in the term. So they try to boost the economy with no solid base.
This has turned in a vicious cycle that doesn’t even out. We’re either doing real great or it’s horrible. We need more of a middle ground. This might mean that the highs aren’t as high but at least they will have a better foundations so the lows won’t be as low.
I totally agree. We’d be in a better place overall if we had solid foundations. The crashes will keep getting bigger, until we reach a point where we can’t just “spend our way out of recession.”
Miranda’s last blog post..Build Up Savings or Pay Down Debt?
@ Miranda - I think we’ve hit that point already. Economic stimulus checks? Hardly did anything but pad savings accounts (it was needed to be spent). TARP? Has that saved us? The more they hand out the more people say they need. Not that I want to be in it but we might have to just weather the storm until businesses build up a foundation again.
We paid off both of our cars in 2008, so now that extra money is being saved. Our credit union has been offering high yield checking - 5% APY as long as we signed up for e-statements, online banking, and a couple other stipulations that are very easy to meet. We’ve had the high yield checking for two months now and it’s been really nice to reap the benefits of it…and seeing the healthy dividend at the end of the month is a great motivator to keep saving away!
I think saving is imperative, no matter what the pundits and politicians say it will do to further destroy today’s economy. If my husband got laid off I would much rather fall back on our emergency fund instead of hoping for govt. assistance that may or may not even be there.
Hannah’s last blog post..Pasquini Livia 90 Espresso Machine and Other Pasquini Products
@ Hannah - 5% is pretty awesome these days! I agree. We need to save. Once we have savings we can spend again. Will this slow the economy right now? Yes. But we’ll be in much better shape down the line when we start spending again.
My wife and I ate through our savings when I was laid off back in August. It was tough and I hated seeing that money seemingly disappear overnight. Things seem to have straightened out for us but it is interesting to look back and see how that money really was a savings account. It saved our broke butts.
If more people were able to “save”, maybe we as a nation wouldn’t need as many cushions like work comp or other systems. Perhaps with savings, when the rough times roll we wouldn’t rely on, credit cards to live and support our lifestyles.
A check from Unc Sam would be great, and I would put most of it right back into our emergency savings account.
@ Jarod - Your situation is exactly why we need savings and exactly why more people are saving now. Many are afraid of losing their jobs so what do you do? You save more just in case.
What you say rings true. If savings were a priority in the first place we wouldn’t be in the mess we have.
It is very ironic how our economy needs our savings right now. I know you are preaching savings, which is good for most people, but our savings are also being depleted by a dropping stock market because we aren’t spending.
It is a vicious cycle that we are facing. I’m young (in my twenties) and just recently graduated from school. I am scared to see what the job market will have for me in the future. I can see this downturn lasting for quite a while.
Thanks for the post!
James’s last blog post..Tax Season: Tax Deductions
@ James - I don’t envy people like you entering the workforce. But, with every downturn comes an upturn. Businesses will have to re-work their models and other will be able to enter the market as others falter. It might be ugly out there for a bit but it will open up again. I’m sure opportunities and businesses will start that we never even thought of prior to this economic mess.
I guess savings and economic growth don’t equate for our economy. It will be interesting to see what the spending trends will be when the economy recovers. Will we all go back to buying SUV’s and drinking Starbucks, or will we put our resources in other areas. Any thoughts?
The Passive Dad’s last blog post..Buy A Foreclosure For Under $1,000. A Little Sweat Equity Needed
@ Passive Dad - Hey, don’t knock Starbucks! But seriously, I’d like to think there will be a fundamental change but I’m not too sure. There are still people out there that don’t get it. I guess it comes down to making the younger generation understand more about money. Are people giving up iPhones, Wii’s, or flat-screen TV’s now? There’s nothing wrong with those if you can afford them. It will be interesting.
I wonder how much of the decrease in American’s debt is a result of foreclosures and bankruptcies?
Joe’s last blog post..What Do the FDIC Insurance Limits Cover?
@ Joe - Interesting question. But I think it’s more that people aren’t spending as much lately.
Funny part is the US economy is based on debt. 70% of are growth is based on consumers borrowing money and buying things with debt. If 35% is debt and we can not afford it what does that say about the us economy other than it is not going to be the same and we have to make things and sell them over seas just the oppasite of what we have done for years now.
hsbc online banking’s last blog post..Best high yield certificate of deposit rates.
@FFB, I think it’s mostly people spending less as well, but let’s face it - a mortgage is often times a person’s biggest single debt obligation. I just thought it an interesting question to pose.
@hsbc… [if that's your real name
],
I’d be interested to see the breakdown of those statistics. For instance, what kind of debt are we talking about? A mortgage on a house a person can’t afford is less troublesome (IMO) than credit card debt because the person couldn’t afford a WII for Christmas! However, I do understand your point that our economy is built on debt to fuel growth, but I don’t think it’s as evil as many make it out to be.
Joe’s last blog post..What Do the FDIC Insurance Limits Cover?
@ Joe - There’s good leverage and bad leverage. We bought most of our car with financing. To some that’s bad right off the bat. But the financing was 0.9% while our online savings is 2.5%. Here it’s advantageous for us to use the credit rather than pay off the car.
Problem is most people are badly leveraged like buying an expensive house at the height of the housing bubble that’s worth less now and you have little or no equity in it.
Debt in itself isn’t bad, it’s how we use it. Lately the country as a whole hasn’t been using it well.
Please excuse my ignorance, but what is the difference between ME giving money to the bank (as savings)and the government giving my money to the bank? If I need something, I buy it, thus stimulating the economy; if I don’t need something, I save my money, allowing the bank to lend it.
Maybe this is too simple, but blind faith in growth turned out to be too complicated even for Mr. Greenspan.
@ Clay - I’m not sure what you mean? I think a big issue these days is people can’t distinguish what they need vs what they want. We buy so much wants that we’re in debt and the savings rate is negative. Now that times are tough people are finally realizing they need some savings in reserve.
Clay,
The difference is that money you deposited in the bank represents delayed consumption. You could have chosen to spend that money and consume, but you did not. In the case of the Federal Reserve, that money is literally printed into existence. Ben Bernanke is now outright buying Treasury securities in an effort to increase the amount of inflation taking place. The problem is that money (whether loaned to us from abroad, never to be paid back, or printed into existence) does *not* represent any increase in production or delayed consumption — it’s just paper.
The end result is that a loan from the printing press comes without any corresponding increase in productive capacity, meaning more dollars are chasing the same amount of goods, which translates into higher prices. In the case where you had saved your money in the bank, the number of dollars chasing goods in the economy remained fixed.
One problem now is that there is no incentive to put your money in a bank, other than the convenience factor. The Federal Reserve has set interest rates to 0%, meaning that for banks, money is free. There’s such an ample supply of money that the amount the bank pays depositors is down to maybe 2% in the so-called “high yield” accounts. Last time I checked I get less than 0.25% in my bank account. This is one less incentive for Americans to save, and we are told that increased government spending will bring us prosperity — what a joke!
Anyway, I hope this answers your question (and more!)
-David
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