After a short period of saving more of their disposable income at the depths of the recent recession, Americans are returning to recent historical patterns of spending more and saving less.
Usually this trend indicates “happy days are here again” as the decline in savings means consumers’ confidence is rising. That is not the case today. Consumer confidence is just half of what it was at the peak of the “good old days” of 2007. That year our national savings rate was 2.1%, just above its post-WWII low in 2005 of 1.5%.
As millions of jobs disappeared and consumers hunkered down during the 2008-2009 recession, our savings rate almost tripled. In 2008 it was 6.2%. This thriftiness didn’t last long; by the fall of 2011 our savings rate was back to a paltry 3.6%.
We were not always such spenders. During the four years of WWII we saved over 20% of disposable income annually. Between 1974 and 1992 the savings rate often bounced between 7% and 11%. Since 1992, the beginning of the unprecedented 18-year bull market in stocks, our personal savings rate reflected the good times in the economy and averaged just 4%.
One possible reason for the decline in the savings rate in the past three years may be that we’re paying off all the consumer debt that got us into trouble in the first place. In 2000 our individual debt load (including student loans and mortgages) was $19,750 per person. In the fall of 2011 it was $36,420, 8.6% less than the 2008 high but 85% higher than the 2000 amount.
While Americans are not substantially reducing their debt, their equity in home ownership plunged from $12.9 trillion in 2006 to $6.2 trillion in 2011. No wonder consumer confidence is so low.
It appears our return to low savings rates isn’t the result of renewed optimism, paying down personal debt, or a surging economy, but rather that Americans are running out of money in the face of staggering personal debt and declining net worth. This leaves them incredibly vulnerable to another downturn in the economy.
Ironically, Americans’ personal finances are a reflection of our government’s fiscal woes. Washington also finds itself compromised to respond to a national emergency because of a debt that exceeds our national income.
There isn’t much you and I can do about our government’s over-debting and overspending except to vote for politicians that promise to end the insanity and hold them accountable. But we can take better care of our own affairs with a three-pronged approach.
1. Get out of debt. We may not be able to earn more or work harder, but I’ll guarantee you that we can spend less.
2. Start saving for emergencies. You need one savings account for periodic expenses like medical deductibles and car repairs. A second is for bona fide emergencies like losing your job or the death of a spouse. It should represent six to 12 times your monthly expenses.
3. Start investing for financial independence. Ideally, you need to put aside 15% to 35% of your income for the time you no longer can or want to work.
The hardest part of this approach is becoming willing to downsize your lifestyle. Too many of us say we are willing to cut spending and economize until it actually comes time to do it. In the two decades before the recession, Americans got out of the habit of making hard decisions in our own best interests. However, as our historical patterns show, we’ve treated ourselves with “tough love” in the past. When we have to, we can do it again.
