Saving money has not been the national pastime of Americans for over a decade, and with the tough economic times we are facing, this may not change soon. Comparing how much Americans save today with how much they saved in the past sheds light on just how far we have progressed down the road to becoming a spending nation rather than a saving nation.
In 1929, the year the stock market crashed and the Great Depression began, Americans were saving an average of 4% of their income. Once the market crashed and many lost their jobs, these numbers plummeted, and by 1932 Americans were saving -1.1% of their income. What this means is that many people did not have income and those who did were finding it necessary to spend more than they made to stay afloat.
However, the coming of World War II changed this.
Jobs became plentiful, and people had a fear of returning to the days of the Depression. “Depression babies,” the grandparents and great-grandparents of today’s adult generation, were notoriously frugal and believed in saving money. By 1944, savings had shot up to an all-time high of 26 percent of income. In other words, one out of every four dollars earned by Americans went into savings. While this is an average, and not everyone saved that much of his or her income during this time, it is clear that savings had become a very important point for the pre-Baby Boom generation.
By the next stock market crisis in 1987, historically known as “Black Monday,” Americans had sunk back to a low of 6.2 percent savings of income. This number steadily declined until it reached 2.1 percent in 2007 during the “credit crisis,” when banks and credit card companies slammed the door on “easy credit terms” and the belt-tightening began in earnest. In 2010, savings rates were back up to pre-Black Monday rates of 6.2 percent and climbing steadily.
American Savings Today
Americans spend about 94 percent of their disposable incomes today. With a median household income of $50,000, Americans pay an average of 19 percent in income taxes, with the rest being spent on housing, food, cars, clothing, and discretionary items. Only six percent remains for savings, although 41 percent of Americans do save regularly.
“The United States currently has the lowest savings rate among industrialized nations. Chinese citizens save about 30 percent of their disposable income, the Swiss 14 percent, and Germans 13 percent”
What drives these spending/saving cycles?
Some experts believe that lifestyle choices are the driving factor behind the lack of income savings. Using credit cards has the psychological effect of tricking people into believing that they are not “spending money,” when in fact they are usually paying twice what they would if they used cash. People also tend to increase their spending as their income increases, buying more things considered “luxury” items. There is some support for this idea in the fact that saving in the United States reached its peak during World War II, when few luxury items were available for purchase.
Other experts believe that savings hinges on inflation. During times of high inflation, less money is available for saving as consumers have to pay higher prices for the goods and services they need. This theory is supported by the fact that the lowest saving levels have always occurred during times of high prices.
Regardless of why Americans save so little, the outcome is clear. As more people lose their jobs with nothing to “fall back on,” they come to rely on government assistance, friends and family, and the “magic plastic” to pay their bills. This cycle is doomed to failure, as at some point the bills have to be paid. The recent housing bubble burst has left many with losses on real estate, once a sure investment; other industries may not be far behind in terms of financial disaster.
How can you beat this vicious cycle and save more money?
This requires some difficult decisions. You may have to forgo the annual vacation and spend that time at home instead. Eating out less and buying in bulk can cut grocery bills and leave more money for savings. Wearing last year’s wardrobe for another year can help you cut clothing costs.
However, one of the quickest ways to have money left over for savings is to pay off debt. Most Americans have far more debt than they can handle, and the interest rates they are paying on this debt are astounding, especially if the debt is a revolving line of credit. Making a plan to pay off your credit cards and personal loans will free up money for savings more quickly than almost any other single action you can take.