Americans appear to be back to their pre-recession savings habits. The personal savings rate in the U.S. dropped to 3.1 percent in September 2017, according to the Commerce Department — the lowest level since the Great Recession took hold.
Meanwhile, Americans are spending more (household debt is at a 10-year high) and consumer confidence has risen to its highest level in almost 17 years, according to data released Tuesday through The Conference Board, a global, independent business membership and research association.
3 reasons we’re saving less:
Household debt is on the rise again. Total household debt increased to $12.84 trillion in the second quarter of 2017, up $114 billion, or 0.9 percent, from the same quarter last year, the Federal Reserve Bank of New York reported in August. This was a new high since the third quarter of 2008, the peak of the mortgage crisis. People may feel they can get access to funds by borrowing when it is needed, rather than holding money in savings, said Andrew Opdyke, economist at the First Trust Advisors.
But incomes are up and we’re spending more. While personal income rose 0.4 percent in September, consumer spending surged 1 percent, the fastest pace since 2009, Commerce reported.
Hurricanes don’t come cheap. The Commerce Department Bureau of Economic Analysis (BEA) said August and September estimates of personal income and spending reflected the effects of Hurricanes Harvey and Irma. Millions were displaced by the hurricanes, and experts say the spending jump was driven by a hurricane-induced uptick in auto sales and increases in gas and household utility prices.
Personal Savings Rate
Total Household Debt
*as of Q3
It’s not exactly news that Americans aren’t the greatest savers. The Federal Reserve reported that in 2016, 44 percent of Americans could not come up with $400 in cash to cover emergencies.
But should we worried that we’re saving less and spending more than we have in a decade?
Economists say that as the economy is humming along, consumers are feeling more confident that they can spend and borrow more without putting themselves in financial distress. It’s no coincidence that Americans saved the most in the same year (2012) that consumer confidence was comparatively low.
Brian Wesbury, chief economist at First Trust Advisors, writes that rising debt levels aren’t so alarming when you factor in overall income growth. Household incomes grew by 3.2 percent between 2015 and 2016, according to the Census Bureau.
“Yes, consumer debts are at a record high in raw dollar terms, but so are consumer assets,” wrote Brian Wesbury, chief economist at First Trust Advisors. “Comparing the two, debts are the lowest relative to assets since 2000 (and that’s back during the internet bubble when asset values were artificially high.”
How to calculate your personal savings rate
Take your total monthly income from all sources (salary, retirement account, etc.), less taxes and money spent on everyday expenses, including debt payments.
Next, divide your monthly savings amount by your total income. Then multiply by 100 to get your personal saving rate.
There’s no magic savings rate to aim for. A good rule of thumb is to save 10 percent of each paycheck for retirement, and establish an emergency fund covering at least three to six months’ worth of basic living expenses.
Evidence suggests that many Americans are just getting by, shouldering record levels of student loan debt while grappling with rising fixed costs. The Consumer Financial Protection Bureau in September reported that 43 percent of American adults struggled to make ends meet in 2016.
But savings is key to achieving financial security. The CFPB study found that adults with savings and financial cushions had a higher level of financial well-being than those who didn’t have a safety net to fall back on.
7 strategies to boost your savings:
- Automate. Many employers can set up automatic deposits of your income into multiple checking or savings accounts. You can have a portion of your paycheck automatically transferred into a savings account so that you will be less inclined to touch that money. It makes easier for you to resist the temptations to spend.
- Make retirement a priority. If you are not able to set aside 10 percent of your income, you should try to contribute enough to capture the full company match for your 401(k), if your employer offers one.
- Track your spending. You will be surprised by the amount of money you spend on groceries or Starbucks once you actually track the money coming in and out. The more you know about your finances, the better off you’ll be. A simple app to track spending patterns is a good place to start engaging in day-to-day money management and establish a habit of saving and budgeting.
- Get rid of high-interest debts. Debts are anti-assets. It makes more sense to pay off high-interest debt, such as credit card debt, than to save. Here are four tips to help you pay down debts.
- Avoid lifestyle inflation. Lifestyle inflation means people spend more as their incomes increase. It is one of the ultimate budget-killers.
- Don’t keep up with the Joneses. Forget them. The key to being satisfied with the state of your finances and your life is focusing on your needs and goals rather than comparing with your friends and co-workers
- Find ways to help break your negative spending habits. Here is a simple $20 rule that can help break your credit card addiction. We’ve also written about other strategies to break bad money habits here.
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