What’s your personal savings rate? As a spender trying to turn myself into a saver, my own savings rate has fluctuated pretty wildly. I’m proud to report that it is in the double digits now, but it was not an easy task getting there.
Nor is it an easy task for our country. The personal savings rate has been in the news quite a bit lately- primarily it is good news, as the personal savings rate increased over last year to 3.6%. While this does sound good, a little history lesson on personal savings rates might be in order.
My grandparents’ generation was incentivized to save by growing up during the Great Depression; the personal savings rate hovered between 8 and 10% from the late 1940s until the mid 1980s. My parents generation, the baby boomers, were implored by their parents to continue this savings trend, but as the dot-com bubble grew, and disposable income increased, spending replaced saving. Exactly why this trend reversed is still up for debate, but many theories point to the “wealth effect,” in which consumption is stimulated by increasingly higher incomes. (Think about it: If you won the lotto tomorrow, would you spend more money first, or save more money?)
For the last quarter of the century, savings rates have gone into precipitous decline, hitting bottom in 2005, with a savings rate in the negative. Simultaneously, personal wealth also took a dip, as the dot-com bubble burst. However, instead of adjusting spending habits to be in line with a revised income level, Americans have had to borrow ever increasing amounts of money to fund their spending. With our reserves so low, credit was constantly needed to keep the wheels of the economy spinning.
Which is part of the reason why this whole “credit crunch” issue is so troubling to our economy as a whole. And why, despite the 3.6% personal savings to sound like good news, in reality we should be saving much more than that. I’ve heard personal finance guru’s mention a 30% personal savings rate. While I’m not making any suggestions for what savings rate is right for you, I do challange you to do the quick math to determine your personal savings rate. Is it where you want it to be?
One small caveat: The way the government calculates personal savings rate doesn’t take into account capital gains. So if you’re someone who primarily lives of stock, you might qualify as a negative saver. Bill Gates does. But for the rest of us, the simple calculation of how much you save of your net income will give you your personal savings rate.
Image credit: Federal Reserve Board of Governors.