I was reading this article and it theorized that sales in a consumer product (in this case, music cd's) has decreased in recent years because people are obtaining their music through other methods (itunes downloads and filesharing) and using the money they would have spent to pay off their credit cards for past music purchases. This seems like a really dumb hypothesis to me, but it got me thinking about a larger issue.

I started to get bothered by the fact that I really didn't know much about the savings rate and how it is figured, so I looked up some information. I've heard multiple times that the US personal savings rate is negative, but what does that really mean?

I did a very simple search and most of the articles came back with articles like this one and this one, which states that in 2005, the savings rate was negative in the US and this was the first time that's happened over the course of a whole year since the 30's, back when people were taking money out just to get through the depression. Seems like a completely different scenario to what is happening now, or at least how it's been presented in the current climate.

Usually, when people make a reference to the negative savings rate (if it is still negative since 2005), it's in the context that the 'average' US citizen is some kind of retarded, myopic moron that is incapable of understanding that if they spend more than they earn, things could be bad in the future. Now, I know that the average person on the street is, by use of the word 'average', not the sharpest knife in the drawer. Still, I don't believe that pessimistic characterization for a second. Now, I also don't believe that people save nearly as much as they should (on average), but I think they do try to save something, even if it is a small pittance in comparison to what they should save. Most of their error, I believe, is caused by inaccurate forecasting of their future needs and the sort of uninformed optimism that I encounter daily in my career. People are blissfully unaware of the future a lot of the time and there are agents out there (marketers, advertisers, etc.) who are trying as hard as they can too keep the wool as thick and far down over their eyes as possible.

So, why are the experts saying that there is a negative savings rate and what does this portend? This article explained some of the specifics about what it means, as well as talking to some experts about their opinions. Got to love those 'experts', they seem to be full of confidence in their opinions. What was interesting is that I began to see how a negative savings rate could just mean that people are drawing down on their wealth, and not necessarily that they are spending 50K a year on speedboats and blow when they only make 35K annually. What if that coke binge and cigarette boat was financed through cashing out some equity on a condo in south beach that has been appreciating in value for years? It's possible.

I recall that back in 2005 or so, people were big time into those 4% mortgages and the housing bubble was really gaining momentum. Isn't it possible that Joe America got duped by some new confidence scam? What if the real estage agent, mortgage finance guy, and others thought they were doing Joe a big favor by helping him buy that new corvette and matching luxury wrist watch, but they were really just exacerbating the problem of growing debt and financial insolvency? I'm no expert, but I know people who refinanced in that time frame, lived it up and spent a lot of money for a short period of time on some pretty silly things, and now they find themselves in a very tight spot since their assets haven't been appreciating as promised. Time for the belt-tightening.

I've seen quite a few people, even on this site, who seem to be in this situation. A few years ago, you may have been riding the crest of the money wave and now you find yourself struggling to stay afloat, lest the undertow sweep your feet out from under you.

Looking back on my own personal savings rate over the past few years, it's just been going up and up. I started out with something like 25% in 2006 and 45% in 2007. How about the rest of you?

The government has been running budget deficits for pretty much the past half century. That's two generations of Americans who grew up under a government that spends more than it takes in. And there have been relatively little economic down time in America during that span.

I don't think people are myopic morons. I think they follow by example. And the example many of us have grown up with is that it's not a bad thing to borrow from the future to pay for today. That wasn't true for older generations. They grew up in an era of personal responsibility where you had little to fall back on if you didn't save what you could.

This is not to suggest that we no longer live in an era of personal responsibility. But it seems pretty clear to me that when it's possible for people (like my in-laws) to live from paycheck to paycheck in debt for pretty much all of their working lives and feel relatively few bumps along that way, there really isn't much incentive to sock money away for a rainy day.

The other thing is that we haven't had a depression in a very long time. The longest economic downturn we've had since the Great Depression was the 1973-1975 recession, and that was only for two and a half years. Prior to the Great Depression, there were several economic downturns throughout the 1800s, most all of them lasting far longer than our modern recessions do. We're in an era of unprecedented prosperity, and severe economic hardship is something most of us have only read about. We complain when we have to tighten the belt by not eating out. But few of us have ever experienced actually going hungry because we physically could not get enough food.

I think when you combine all of this, you're looking at a few generations who have had it relatively easy by comparison. Not many of us have had to learn the harsh lessons our predecessors did. We don't have the firsthand experience of suffering like people used to face, so it's difficult for us to fully appreciate it.

This begs the question, is the government following the people or are the people following the government.

I think it is a little bit of both. People want the government programs, but they don't want to pay for them now. They run their finances the same, they run up credit cards until they are forced to address the issue. Then they have to tighten their belts and fix the issue. It can be an eye opening experience.

My savings rate is current 34%.

Interesting comparison. I'm no economist, but it would seem to me that in very general terms, the same principals would apply to government finances as individuals. In this case though, the government has been managing to float the debt by passing along the debt to the people through income tax. That's what our tax dollars do, just pay the ~6 billion a year interest on the government's loan from the Fed.



Yeah, like lemmings. I'm guilty of this too. Paying taxes and quietly complying with the laws of a government that is clearly broken, poluting the environment through use of nonrenewable energy sources, working too many hours each week to 'get ahead', and a million other things all seem 'normal' since everyone seems to be doing it. Some people are able to discern a little more of the big picture than others. The sad thing is that those people who seek to really understand a lot of these key issues are quickly labeled as members of the out-group, and thus, marginalized by members of the indoctrinated.

I think this topic came up earlier on the forum, and I'll say again what I said then: your feasible savings rate is large in part determined by your income. If you're making $15,000 a year, you're probably going to have a very small savings rate because almost all of your income will be spent on food and shelter, with little left over. If you're making $150,000 a year, you can afford to have a much higher savings rate.

So I think comparing people's savings rates doesn't tell you very much unless you're comparing savings rates of people who are all in the same income range.

I think it's a snowball effect with both following and assuming the other is doing the leading.

I disagree. The standard of living in the US should be taken into careful consideration when making a statement like this. If you make 15k a year, and save 5k, you live on 10k. This might not mean a modest studio apartment, but it does mean you have a roof over your head, albeit with numerous roommates.

Case in point, I lived fat and sassy for 2 years off an annual salary of 12k. I made use of the resources the area provided, like free lunches by the Krishnas, volunteered at a homeless shelter and ate dinner there once a week, rode a bike to and from work, and so on. I was happy and healthy.

Granted, I did not have any dependents and health care was provided through the University. However, I believe it is very possible to live off a meager income and still save aggressively.

I have always been told it isnt how much you make it is how much you DON'T spend.

That said I think my savings rate is something on the order of 27-30%

Maxed out 401K, fully funded Roth, and around 10K of additional savings per year.

I am amazed the pressure people will put on to spend more money if they perceive that you having savings or are good at savings etc.

My parents constantly question my choices of driving an older car or not having new furniture etc.

My parents believe in no debt, have paid off their house, own their cars, save for retirement, etc... BUT where as I view saving the MAX now as important to give my money the most time to grow for me, they view extra income after retirement etc etc as providing better quality of life.

I admit that this is a struggle I fight with as well.

Becca, so now that you make more than 12K a year you've ballooned your spending? Lol @ fat and sassy though. I can picture the fat part, but sassy as well? I guess it's all about the attitude. Kinda like Carlin's famous 'fine and dandy' routine.

I think Brad's on point about how it's relative. Sure, each % point is less money when you make 15K a year, but it's tougher to find those dollars. The struggle is to not let the spending increase relative to earnings. We know taxes are going to increase, so that's unavoidable, but if you go from making 70K to 100K a year, it should be easier to save a higher percentage of that extra 30K than the person who went from 15K to 45K, because along with that big jump, probably came other hidden costs.

I know that each time I've experienced an income boost, it never fails that the combinations of spending creep and job costs eat away some of that new money.

The pressure can be tremendous. My MIL is constantly harping on my wife to buy stuff.

We have a modest swing set in the back yard for the kids. My MIL thinks they deserve one of those big wooden ones. When my wife told her we couldn't afford one, my MIL said that we could afford it because we had the money in savings. From her perspective, we were depriving our kids of this swingset because we selfishly wanted to save our money instead of spending it.

It's been tough for my wife to escape that mentality when you consider she grew up in a household like that.

uh. Why don't people understand this?

He's right, your savings rate is dependent on your income.

Saving $5K out of $15K is harder then saving $50K out of $150K
Living on $100K is a lot easier (and better) then living on $10K; even though it's the same percentage of savings.

If you make $200K a year, it's easy to save $150K a year and live on $50K
If you make $20K a year, it's not so easy to save $15K and live on $5K

It can be done, but at the lower end it get harder. There is only how much you can (or are willing) to cut expenses.

Secondly, at most you can "only" cut 100% of your expenses. You could save 100% of your income (theoretically).
But your income "potentially" is theoretically unlimited. You can theoretically double your income (which would be "par" for cut 100% expenses), but you could also TRIPLE your income; where as you can't cut more then 100% expenses!

You can't save %200 of your income no matter how much you try!
But you can increase your income by %200.

Frugal is good, to a point; but there is a CAP!
Increasing your income has no theoretical cap.

Secondly and my main point; there is a "fix rate" of expenses you have to pay, regardless if your income is $15K or $150K. That "fixed rate" of expenses is a LARGER percent of lower income then of higher income. Since it takes more out of the lower income (% wise) then it means obviously you can't save as much (% wise).

LOL!

You might think so, but there are hundreds of thousands of counterexamples walking around out there.

I agree with rhino. I make more than that and live on less, and I don't feel at all deprived.

That doesn't mean it's not easy to overspend as well, but that's not the question.

I disagree. "It's not how much you earn, it's how much you save."

Your comment sounds to me like another form of the poor-man's excuse for not having any savings: "Well, if I just made a little more money, it'd be easy to save."

Most experts agree that in order to retire without sacrificing your standard of living, you need to save up an amount equal to 25 times your annual expenses. Someone who earns $150,000/year needs $3.75 million to replace that income and keep their life the same. To achieve that in 40 years (saving from 25 to 65, at 8% interest and ignoring inflation), they'd have to save $1,100/month, or about 9% of their income.

Someone earning $30,000/year, on the other hand, applying the same 25x multiplication factor, only needs to save up $750,000. Again, in the same 40 year window, at 8% rate of return, they'd only have to save $240/month, or about ... 9% of their income.

No matter how much their income was, the same savings rate (9%) both gave them the same end result. In both cases, the individuals would be able to retire at 65 and enjoy the same lifestyle they had throughout their entire lives.

You're saving more than $150,000/year??? Are you serious?