The fall and rise of personal savings

Americans are beginning to save again, or so the media is reporting. The personal saving rate has jumped from 0.4% in 2007 to a whopping 6.9% in May. But what does that mean? Is it a good thing? And how long will it last?

The Personal Saving Rate

“Personal saving rate” is an economic term for income that is not used immediately to buy goods and services. It's money that consumers save for the future. (According to Wikipedia, it's “personal disposable income minus personal consumption expenditure”.)

For decades, the personal saving rate hovered at about seven or eight percent. It would spike into the teens during times of economic turmoil, but then settle at seven or eight percent when things returned to normal. During the early 1990s, the personal saving rate began to drop. For the past ten years, it's mostly been two percent. Or one percent. Or close to zero.

But, as resident GRS economist JerichoHill has noted in the past:

The personal saving rate is a very poor metric. Most folks save via IRA and 401K. So we should look at that savings rate, which is the national saving rate. The NSR shows the same disturbing downward trend, but is the more proper metric to use, in my opinion.

In other words, the personal saving rate doesn't tell the whole story. One reason for the drop is the increase in retirement savings via other methods.

Still, the personal saving rate can be a useful barometer. It may not account for retirement savings, but it does account for things like emergency funds, etc. Plus, it's the number that the mainstream media reports. For these reasons, it makes sense to use the personal saving rate as a gauge.

The U.S. Bureau of Economic Analysis provides historical data about the personal saving rate, as well as charts that graph the data:

 

The Bureau of Economic Analysis also provides a monthly press release summarizing the current state of income and saving in the United States.

The Stimulus Effect

As you can see from the BEA graph, the current recession has had a huge impact on the personal saving rate. We were saving at close to zero percent throughout 2007 and into 2008, but when the economy began to teeter, people started to save. Here's the personal saving rate for the past twelve months:

 

When things went to hell in October, Americans boosted their savings. But look at that spike in May. 6.9%?!? Can that be right? It turns out the data is misleading. Reporting for the L.A. Times, Tom Petruno explains:

…[A] single month's data can be skewed by unusual items.

That's what happened in May: One-time federal stimulus payments of $250 each to retirees and others receiving government aid — so-called transfer income — drove total personal income up 1.4% from April, while spending rose a modest 0.3%.

That boosted what the government calculates was left in people's pockets. Savings as a percentage of total disposable income jumped to 6.9% from 5.6% in April.

This same effect can be seen each time the government has issued stimulus checks in the past decade. (You can actually see the tail-end of the effect in the year of data I posted above. The personal saving rate for May 2008 was 4.8%, then 2.5% in June, and 1.7% in July. This is a result of last year's stimulus checks.)

So it seems that many people really do save their stimulus checks when they receive them. I think that's a Good Thing. And it also looks like the personal saving rate in the U.S. has increased to levels last seen during the mid-1990s. But will this change last? Or is saving just a passing fancy?

Saving For the Future?

When people ask me about the state of the economy and its effect on consumer habits, I'm cautiously optimistic. I'm pleased that the average person has begun to consider saving a priority. But I'm also skeptical that any real change has taken place. I think people are scared and so they're saving, but I'm worried that as soon as things settle, they'll resume their old habits. I'm not the only one who believes this.

Suzanne S. recently sent me a Mediaweek article featuring comments from Google CEO Eric Schmidt. Schmidt — who obviously is not a financial expert — believes the economy will begin growing again later this year. And when it does, he expects consumers to resume spending.

“It's shocked me that Americans started to save,” Mediaweek quotes Schmidt as saying. “My guess is that's a temporary phenomenon.” More from the article:

But Schmidt does not believe the economic crisis has shaken U.S. consumers' proclivity to spend money by going into debt. “Americans love their credit cards,” he said. “If people are concerned Americans will stop spending, you do not understand the American psyche.”

I worry that Schmidt is correct. I worry that this recession will not be a generation-defining event, as some have predicted. I want for this crisis to have changed things, but I'm not sure it has.

But maybe some Americans have learned something from all of this. And maybe my own efforts have been enough to make a difference in a few lives. I want people to understand that nobody cares more about their money than they do. The best defense against an unknown future is to take action now, to build a buffer of personal savings, to reduce the burden of debt, and to develop skills that will make you valuable to yourself and others.

Just because the average personal saving rate across the nation is low, there's no reason that your own personal saving rate can't be 10%. Or 12%. Or 15%. Or more.

More about...Economics

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partgypsy
partgypsy
11 years ago

From my personal perspective, this recession has shocked me into realizing an emergency fund is a necessity, not an option. So, have started saving for an e-fund that will take the next 1-2 years to fund. Maybe that’s what alot of other people are doing as well. Once those e-funds are in place, that’s when it will be interesting to see what people do with their money after that.

JerichoHill
JerichoHill
11 years ago

JD didn’t mention one possible cause of the rise in the personal savings rate that absolutely should be mentioned. Since the PSR only measures income minus expenses, if workers reduced their 401K contributions during the recession (something that many of my coworkers have done), then their overall expenses would decline by that amount. If consumers did not spend this reduction in savings, then their personal savings rate would go up (Alternatively they could spend some of it, but the PSR still rises. This is a reaction similar to a bank run(on retirement savings behavior). What worries me is that when… Read more »

Holly
Holly
11 years ago

I am optimistic that those who have been affected by this economic downturn in any real way will continue to save. The shock of losing so much ground on our retirement savings has convinced me that, now that we’re entering our forties, we had better scale back hard so as not to suffer the consequences of undersaving. My renewed outlook is here to stay!

the weakonomist
the weakonomist
11 years ago

JD, first of all, I’m very proud of you for writing about this topic. This is the realm Weakonomics usually plays in and it makes me feel good that someone from the top of the PF Blogosphere is starting to dabble in economics more. I do have some thoughts to add. The actual rate of PSR isn’t the important figure. What we care about is the trend, are we saving more or less? We shouldn’t read a PSR of 5% as bad because it’s not the 15% rule we all love. I am glad you pointed out the difference between… Read more »

Brian
Brian
11 years ago

I fear that people have been holding back so much that they’ll go on a spending orgy once things turn, and won’t stop.

It might be time to get into the storage rental business…

Tyler@FrugallyGreen
11 years ago

Nothing breeds action quite like necessity. Unfortunately, nothing breeds contempt quite like it, either. When you’re a small child and your mother tells you to “eat your vegetables,” If you were like me you frowned and pushed them around on your plate with your fork. The story is a bit different, however, when all there are are vegetables. Americans are doing what they have to in order to make it. I’m really glad that they are too, as I initially thought we would just continue to force ourselves further and further into debt until the economy gets ironed out. I… Read more »

KC
KC
11 years ago

I think most people 50 and under (myself included, I’m 35) have never known a time when things weren’t really prosperous and credit wasn’t fairly easy to obtain. This was our first big shock. Although I believe the worst is over, there will be lingering effects for a while. This is the kick in the pants we as a nation need to start saving more. To me credit is really the key. I can remember growing up in the 70s and my parents not having a credit card and having a hard time getting a house loan despite having 20%… Read more »

Sandy E.
Sandy E.
11 years ago

I imagine that many people with jobs are saving hard now in the very real possibility that they too could be laid-off at some point in the future. The unemployment statistics are staggering. While saving our stimulas checks may be a “good thing” for the individual, it is an absolutely lousy thing for the economy, and the plan back-fired, not giving the country the boost that it so desperately needed. Maybe they should have given out universal gift certificates instead.

AD
AD
11 years ago

I think the changes might stick for some, but not for most. To make lasting changes in your finances (and in other areas of your life) there has to be a mindshift. If someone is saving because the media reports only gloom and doom, then as soon as the media decides to paint a rosy picture, there is no reason for that person to keep saving. If someone sees the connection between freedom and finances, and how Stuff can obstruct reaching important goals, then they are likely to change their outlook and their habits. It’s the same with fitness. If… Read more »

Paul in cAshburn
Paul in cAshburn
11 years ago

What surprised me is that there’s a “personal savings rate” and there’s a “national savings rate” and I don’t remember having them both reported – or the difference explained – in any of the news outlets. I wonder how many readers here are like me… we consider ourselves to be financially aware, but when we hear something from the news outlets we interpret it in our own way – with a less than full understanding of what’s really being said. Was it Mark Twain that said something about there being lies, damn lies, and statistics? We get so little in… Read more »

Chris Roland
Chris Roland
11 years ago

This is a great article. I love seeing the data and trend. I think this is a great opportunity to change the saving mindset.

Tyler
Tyler
11 years ago

Another possible reason for the uptick in savings for the month of May would be tax returns. Same thing with May ’08.

Becky
Becky
11 years ago

“But maybe some Americans have learned something from all of this. And maybe my own efforts have been enough to make a difference in a few lives. I want people to understand that nobody cares more about their money than they do.” There will always be those who learn and those who don’t. Thanks for your part in educating people, JD. You’re an inspiration to many who have been deeply in debt. Those of us who have never been mired in the kind of consumer debt you had still enjoy your story. At least I know I do. While I… Read more »

Elizabeth
Elizabeth
11 years ago

J.D, you’ve made a difference 🙂 I’ve found that a lot of publications are focusing on the “get by until things get better” line, but your site focuses on making better money management a lifestyle rather than a temporary fix.

However, there’s always the lure of lifestyle inflation — and I think we may see that once the “crisis” is over.

Attagirl
Attagirl
11 years ago

My thought was that it was people who were born in or after the 1970’s and became adults starting in the 1990’s who never saw credit as difficult to obtain. It really surprised me to read J.D.’s post about credit card companies on his college campus. There was nothing like that when I was in college in the 80’s. At the time, you still had to prove you were ‘creditworthy’ and had to ‘build your credit’. Of course, have proven your creditworthiness, you were perfectly free to get in trouble with it. Frankly, I feel lucky that I didn’t have… Read more »

Beth
Beth
11 years ago

Ah… the spending habits of Americans…

I base my savings on my current income and financial goals, not on what’s going on in the economy. I was building up savings, investing, and building an emergency fund before this all happened, and I will continue to do so in the future.

What the crisis really changed was that more people are doing the same thing I’ve been doing all along — so I’m finding friends and family are more understanding when I don’t want to buy the latest toy or eat expensive meals out!

Jonathan
Jonathan
11 years ago

Saving may be a bit reactionary right now for some of us, and that habit has to turn into an actual choice – a personal decision – if it’s going to last “when things pick up.”

Craig @ Money Help For Christians
Craig @ Money Help For Christians
11 years ago

I would agree that the increase in saving is more a sign of a current emotional frenzy rather than a deeper fundamental approach to savings. Once news outlets forecast clearer economic weather ahead those savings will likely flow right back into the hands of retailers.

I was recently surprised when I read that American are now saving more than Canadians. If the trend continues this will be first year in 38 years that Americans have saved more than Canadians.

Cely
Cely
11 years ago

I also wonder if, once the economy picks up, people will decide they need a “reward” for the financial hardship they endured. That seems to be a common cycle, whether it’s saving money or eating right. “I worked so hard, now I deserve to splurge.”

thefamilynomics.com
thefamilynomics.com
11 years ago

Really nice article. I think the common sense rule of spending less than you earn is the golden rule, no matter what the economy is doing.

Eden
Eden
11 years ago

Good post. You are right in thinking that the lessons from the current recession have not made a lasting impact. But, don’t despair, the depression we are entering now will make a lasting impact that will be felt for decades. There is no economic data to support the idea that things will improve in the economy any time soon or even that we have seen the worst of things yet. Start looking at the real hard numbers (hint: if it comes as an opinion piece in the MSM, it isn’t based on the facts) and you will see how shockingly… Read more »

Jessie
Jessie
11 years ago

Great Artical!

I would be interested to see the national credit card debt mirrored against those figures.

So, are people saving, but racking up debt? Are people paying off debt but not saving?

Cheers,
Jessie

Pirate Jo
Pirate Jo
11 years ago

I’ve always been a saver. If anything this economy makes me less inclined to save for the future, because I don’t think there is any vehicle I can put money into where it won’t lose value.

Steve @ Freedom Education
Steve @ Freedom Education
11 years ago

Hey J.D.,

If the trends you shared are correct, it would seem that American’s savings accounts are moving in the right direction, but still it makes me wonder.

Just because there is an increase in savings doesn’t mean there has been a reduction in spending. Some people borrow money to save and at the same time still manage to spend the same amount of money. Spending is a habit that doesn’t change unless it’s done at a much deeper level of unconscious.

Sam
Sam
11 years ago

I have made regular savings a part of my budget/spending plan since I graduated college. But a couple of years ago (before the great recession) my new husband and I made a choice to change the way we deal with money, credit and debt and since that time our non retirement savings (outside of our 401k and IRAs) has increased for two reasons. First, we are working on increasing our emergency fund so a good chunk of our savings goes into the e/r fund. Second, instead of purchasing goods/services on credit we now save up for anything that is above… Read more »

SS
SS
11 years ago

I always wonder if there are way too many competing complex factors to make these numbers worth anything. Maybe the savings rate going down was a sign of something ‘good’ happening (boomers all having huge retirement savings accounts and are now spending well in retirement without bringing in any income, producing huge negative ‘savings’ amounts for their population and bringing down the overall rate because of this). Maybe the savings rate going up not so much b/c people are voluntarily acting more responsible, but rather as a result of credit lines and HELOCs have finally been maxed out, bankruptcies and… Read more »

Andy
Andy
11 years ago

I hope this continues when the economy recovers. Saving money isn’t just important; it’s vital. You need something to fall back on. You need an emergency fund. You need a lifeline. I applaud everyone who’s socking away money right now.

Daniel
Daniel
11 years ago

“I want for this crisis to have changed things, but I’m not sure it has.” Americans as a nation have about the attention span of goldfish when compared to world history. Look at the Great Depression and those who lived through it and became better savers as a result. Then look at the generation or two after them. It hasn’t even been a century and we’ve seen both extremely frugal years and years of extreme spending and debt. And now the cycle may repeat itself. To be fair, though, the problem wasn’t just with Americans this time ’round. “We are… Read more »

saving it up
saving it up
11 years ago

J.D. you have made a difference for many people. My life circumstances (divorce and bankruptcy) forced me to change, your website helped me learn how to change, and those changes are sticking. “Do not become weary in well doing, for in due season, you will reap a harvest . . .”

Dave Farquhar
Dave Farquhar
11 years ago

KC @ #7: You’re right, but things really got out of control in the last half-decade or so. In 1988, my Dad found himself in the situation you describe: a good job, great credit, 20% down, and struggled to find a bank willing to make him a loan to buy the new house he was planning to build. 18 years later, not only were people falsifying how much they made and getting the loan anyway, I’ve read a few stories about BANKS falsifying it in order to be able to give the loan. Amazing. I also saw credit change dramatically… Read more »

Generation Y Investor
Generation Y Investor
11 years ago

I think this recession has changed the way some people view savings and personal finance. However, I think that many of these “new savers” will regress into their old spending habits at the first sign of economic recovery. There is just too marketing and American’s will always be hardwired to spend.

That being said, there will always be savers and investors like those of us here who read GRS and other personal finance blogs. We just place a higher value on financial security/freedom.

-Gen Y Investor

Charley Forness
Charley Forness
11 years ago

I, too, am a bit of a sceptic based on our recent trends and the culture of America. Despite the job losses and reports of tough economic times, most folks still have a place to live to house their stuff, still have a TeeVee to inundate them with commercials on buying more stuff, still have a car to drive them to the store to buy more stuff…etc. I feel like one of the lucky ones. Though my company froze rate increases this year, I still have the same job I had last year, a nice home etc. What the recession… Read more »

Jay
Jay
11 years ago

With savings really going up (and I am discounting some of the good reasons above) what has America really cut back on. My guess, and please submit you own, looks like this

1. Eating out
2. Delaying a major purchase
3. Remodeling
4. Cable
5. Trading down from Macy’s to Target
6. Vacations

I have some other thoughts as well but they don’t fit in a bullet point to well. Like I said please feel free to comment on your own thoughts.

Associate Money
Associate Money
11 years ago

I am glad that personal savings rate is on the mend and a lot of people now realize debts cannot be used to fund a extravagant lifestyle indefinitely.

However, I am worried that when the good times return, and credit card companies start waving the bottle under our nose, we will throw caution to the wind and start living beyond our means again.

The recent stock market rally tells me that people easily forget their lessons and are prone to speculation.

Bulldog Gin Co.
Bulldog Gin Co.
11 years ago

We need people to spend to the hilt again. It’s the only way we can get rich and cash out.

Ben
Ben
11 years ago

Bulldog Gin Co….I thought about responding to the idiocy of your comment….but someone making a quarter million bonus every year doesn’t need business or economic advice from little old me.

Marisa
Marisa
11 years ago

I’m actually pretty optimistic that savings will remain relatively high after the economy improves. I think that, for the first time ever, most new savers are automating their savings, which means that they a) are accustomed to having that money automagically disappear and b) would have to take explicit action to STOP saving. It’s a reversal of the usual financial problem with getting people to save – in this case, the path of least resistance is to continue saving.

Evin
Evin
11 years ago

Also very happy to see the savings rate rise, much to the government’s distress. After all, how will our economy improve without Americans spending? They have backed themselves (us) up against a corner. They have structured the latest and future economic stimuli on infusing cold cash (albeit borrowed) into banks, auto corporations, credit and insurance companies and our paltry $13 per paycheck increase by lowering withholding (you’ll have to pay the difference in April). They NEED us to spend! Problem is… NO ONE is spending, including the banks and credit providers. Everyone is saving! To make matters worse (or better… Read more »

Brenda
Brenda
11 years ago

Isn’t a nation of super-savers counter-productive to a recovering and healthy economy? I’m struggling to see exactly where the balance lies between people saving and the economy’s need for people to spend their money on goods and services, which in turn creates more jobs. If *everyone* was to be super-frugal all the time, and do all the steps listed in comment #33 (no offense, it’s very good advice and I too follow those steps), we’d see major businesses go bankrupt and close their doors (no more Macy’s!), entire cities become ghost towns (people not taking vacations means tourist towns shutting… Read more »

Matt Jabs
Matt Jabs
11 years ago

@JD: I do believe the recession will have lasting effects. I think a broad stroke change is something no one will see, but… thanks to this financial crisis there is a percentage of people who have had the veil torn and now have eyes to see & ears to hear! Something few are talking about is that the current frugality movement interacts very harmoniously with the green movement along with the self-reliant movement. I am noticing an increased percentage of people desiring to live simply & increase their sustainability. This “Simple Living” trend commingles frugality with sustainable, self-reliant, “green” living.… Read more »

MLR
MLR
11 years ago

I definitely think we will go back to a pre-1990s savings rate. Whether I would call the drop in savings rates during the 90’s and 00’s a deviation, though, is questionable. The 8% spending rate everyone is shocked over… it’s a joke. All one needs to do is look at equity extraction rates over the last 15 years. Compare that to the savings rate. You will notice one thing: They are inverse. Why inverse? People were being told “your house won’t lose value! we have the best economy in the world… the stock market will keep going up!” Because they… Read more »

MLR
MLR
11 years ago

One more thing to note: The savings rate includes debt repayment.

So just because the savings rate is up doesn’t mean people have any more $$ in their bank accounts!

Beth
Beth
11 years ago

Brenda, I think you’re right. Perhaps our frugal lifestyles only work because other people are spending? It seems to me that we’re only at an advantage when what we’re doing isn’t the norm. For instance, I’ve never been able to afford to travel or eat out very often and the hospitality industry used to do just fine without me. However, now that everyone else is cutting back on these luxuries, the industry is hurting. My spending and saving habits haven’t changed that much since the recession hit, but I’ve been able to get some great deals on things I’ve budgeted… Read more »

Debby Wang
Debby Wang
11 years ago

Hi all! I am the Director of Corporate Development at Bulldog Gin. While we fully support free speech in selecting blogging names (in fact, we’re flattered our company name has been chosen), I want to bring to your attention that the previous bloggers’ views does not in any way represent our company view. Bulldog Gin is an ultra premium gin handcrafted in London. It is infused with an exotic melange of botanicals that includes lavender, lotus leaves, and dragon eye, and is the highest rated gin by Wine Enthusiast (a Top 50 Spirit in 2008). To experience Bulldog Gin, please… Read more »

Larry
Larry
11 years ago

JerichoHill doesn’t understand the meaning of “national saving rate.” It’s just the combination of personal savings with government and business savings. The San Francisco Fed page, http://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedurl=/2005/0508.html , says that you should use the national saving rate because it’s more comprehensive, but it certainly doesn’t say that personal savings doesn’t include 401(k) and IRA contributions. What do you think those are, corporate retained earnings or government surplus? Here is what it says: “Since IRA and 401(k) contributions are not part of personal outlays (and, therefore, must be included in the difference between personal income and personal outlays), these contributions are… Read more »

Beth
Beth
11 years ago

Debbie, you had me believing you until you turned your comment into an ad. Now I have less respect and interest for your company than I did before.

J.D., why are you allowing that?

J.D.
J.D.
11 years ago

@Beth (#46)
I’m allowing the Bulldog Gin people to do this once because I think they have a valid complaint if somebody else is using their name in the comments. As you know, I generally don’t let people advertise in comments, but this is a special case. No worries: not a blanket policy change.

E
E
11 years ago

Regarding the fear about what would happen to the economy if everyone were frugal: It’s so far from happening it’s not even worth worrying about. It’s like the argument that I should have a kid because if no one had kids the human race would go extinct. There is no risk that everyone will abstain just because I do; therefore I feel confident that my choice to be childfree – or frugal – will have no adverse societal effect, and will have enormous benefit to myself. Even if everyone on this blog, and all their families, were a bit more… Read more »

Strabo
Strabo
11 years ago

“Isn’t a nation of super-savers counter-productive to a recovering and healthy economy?” Yes. While individually it’s better to save it is pretty hard on a economy that is built on people spending. Companies, service providers, restaurants etc. were built accommodating a certain level of spending. If this level of spending drops those companies won’t be able to sustain themselves and many will be out of business, which means people have less jobs, being able to spend even less and so on. A Death Spiral. That’s why the governments worldwide currently make up the difference in spending (be it because of… Read more »

Sean
Sean
11 years ago

In response to weakonomist @4 – Schmidt is a businessman. I think you’re confusing him with Larry & Sergey, the founders of Google.

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