Why aren't people saving more?

[TxQuiltGirl]

http://online.wsj.com/article/SB1150851036...s_editors_picks

 

 

It's time to put our house in order -- and maybe the garage, too.

 

The U.S. savings rate has fallen sharply since the mid-1980s. In fact, last year, it was negative for the first time since 1933.

 

At first blush, this collapse in the savings rate seems puzzling. Our incomes have climbed at a healthy clip over the years, easily outstripping growth in spending on key items like food and clothing.

 

So why do we find it so tough to save? We can't, it seems, blame it all on morning lattes and evenings out. Instead, the big culprits are our two largest expenses: The roof over our head and the cars in our driveway.

 

• Signs of struggle. Some pundits have argued that the savings rate isn't as low as the official statistics suggest, or that Americans don't need to save so much because they are wealthier than ever. But when I look around, I see plenty of signs of financial distress.

 

 

A study sponsored by Putnam Investments estimates that seven million retirees have chosen or felt compelled to return to work. A Pew Research Center survey discovered that 20% of baby boomers had provided financial help to a parent within the past year. Families are also finding it tougher to pay for college, with College Board data showing a 194% increase in annual borrowing through college loans over the past decade.

 

 

All this suggests folks are struggling to make ends meet. But why? Consider a new study from the U.S. Department of Labor titled "100 Years of U.S. Consumer Spending." The study draws on the Bureau of Labor Statistics' consumer expenditure survey.

 

It might seem like Americans spend too much on clothes, eating out and entertainment. In reality, however, the portion of our spending that's devoted to food and apparel has fallen sharply over the past century.

 

Tobacco and booze also account for a shrinking share of spending. Meanwhile, the slice of our budget that goes to entertainment and health care isn't much changed from 40 or 50 years ago. Indeed, if you look at all these categories, you might imagine families have ample financial room for maneuver.

 

• Road to ruin. Yet we struggle to save -- and the blame seems to lie with two other expenses, transportation and housing.

 

 

Our transportation spending jumped sharply in the 1960s and has remained high ever since, accounting for more than 19% of spending in 2002-03. It's easy to see why: The number of passenger vehicles has leapt 270% since 1960, far ahead of the 86% increase in the adult population. We now have one car, van, pickup truck or sport-utility vehicle for every adult.

 

"The automobile is no longer a luxury item," says Michael Dolfman, the Bureau of Labor Statistics' regional commissioner in New York and co-author of the new BLS study. "Cars became a necessity to get to work," with working couples often needing two cars.

 

Meanwhile, housing expenditures have climbed fairly steadily over the past century, and our homes now claim a third of our spending.

 

More families are buying houses, more folks are purchasing second homes, and houses are getting bigger. According to the Census Bureau, over the past 25 years, the number of second homes has jumped 95% and the size of the typical newly constructed single-family home has ballooned 40%.

 

• Saving ourselves. Put it together, and houses and transportation accounted for 52% of all expenditures in 2002-03, up from less than 41% in 1950.

 

 

You probably need to have a car, and you've clearly got to live somewhere. Still, it strikes me that housing and transport expenses are ripe for cutting, if only because they are such plump targets.

 

But how are you going to cut back? Consider this: We may be spending more on cars and homes, but we are also purchasing cars and homes that are far more luxurious.

 

"The trend has been to buy the most house you can afford, rather than the amount you need," notes Sophie Beckmann, a financial-planning specialist at A.G. Edwards in St. Louis. "It's the same thing with cars. You see a lot more luxury cars on the road. While you can get by with a $20,000 car, people buy the $40,000 SUV with the leather seats and the TV. There's a lot there that's discretionary."

 

Indeed, if you're willing to skip the heated car seats and the third bathroom, you would probably still be living better than your parents did -- and you will free up money that can be saved.

 

This suggestion may puzzle some readers. Sure, cars might be money losers. But houses appreciate over time, so shouldn't you buy the largest home possible?

 

That might have been true during the recent housing boom -- but it isn't likely to be true over the long run. Since 1975, home-price appreciation has been modest, averaging just two percentage points a year above inflation.

 

Admittedly, you could goose your home's return with the leverage from a mortgage. You also, however, have to factor in the mortgage's cost, plus all the other expenses of homeownership, including maintenance, property taxes and insurance. The bottom line: Once you deduct those costs, you could probably amass far more wealth by purchasing a smaller home and then sinking the extra money into your 401(k) plan.

[hegemony]

maybe the low returns on savings matters too?>???

[Marty716]

maybe the low returns on savings matters too?>???

 

Does the word "savings" also include investments in stocks, bonds, and commodities? Or does it only include savings accounts and Cd's in banks? I don't have much of a savings account but I have a lot of savings in mutual funds...so I can get a good return.

[TxQuiltGirl]

maybe the low returns on savings matters too?>???

 

Does the word "savings" also include investments in stocks, bonds, and commodities? Or does it only include savings accounts and Cd's in banks? I don't have much of a savings account but I have a lot of savings in mutual funds...so I can get a good return.

 

 

I believe that savings means any money not spent - whether that is in mutual funds, cd's, a bank account, whatever ...

[preezie]

There are so many things that have to be taken into consideration when asking this. I have thought about this over and over and I know it has a lot to do with advancements in technology, rising cost of living versus salaries, more single parents, more single women, more single men, cost of education, etc. Although, I do agree with the article that we tend to waste a lot of money, there are plenty of other reasons as well.

[hlburi]

maybe the low returns on savings matters too?>???

 

 

Low returns? The stock market has historicallly provided a better investment than a house ever will.

[hegemony]

maybe the low returns on savings matters too?>???

 

 

Low returns? The stock market has historicallly provided a better investment than a house ever will.

savings not investments. what is the average SAVINGS APY???

 

and where did I say anything about a HOUsE?????

 

(BTW we've had 105% appreciation in 4 years on our home, my stocks have not done that well).

Edited June 21, 2006 by hegemony

[hlburi]

savings not investments. what is the average SAVINGS APY???

 

and where did I say anything about a HOUsE?????

 

(BTW we've had 105% appreciation in 4 years on our home, my stocks have not done that well).

 

Savings ARE Investments. Investments are Savings. ToMAYtoes...ToMAHtoes...

[radi8]

The methodology used to calculate "savings rate" is fairly flawed. The Feds have screwed with this calculation over the decades to advance certain political causes, it isn't terribly accurate.

 

They do NOT actually look at what is saved.

They look at income (and not income from all sources) and from that, subtract spending. They assume that any money left over is "savings" and any deficiency is negative savings.

 

Problem #1 is that not all income is considered. Certain types of investment income are excluded among other things.

 

Problem #2 is that large purchases are fully subtracted from income in the year the purchase was made.

If your salary is $100K/year and you purchased a 125K home, you are -25K for that year with that purchase alone. In reality that's not the way it works. Sure does whack the averages though, particularly when home sales hit record highs.

 

Problem #3 is that certain types of investments are counted as "expenses/purchases" instead of investment or saving.

 

There are more, but those are the ones that come to mind right away.

 

If you do the math the right way- the savings rate is still embarrasingly low- but if I'm remembering right it isn't negative either.

[TxQuiltGirl]

That's interesting information radi8. I should have known you'd have the skinny. (yes, that IS shameless sucking up to one of the bosses)

 

I still wonder how many people are actually putting money aside - whether in a 401k or 403b, or a bank account, or any kind of investment, really. I would think that if one is looking for some kind of return, a bond would be okay. I'm not sure, but I do know that I have had the *#$( kicked out of me in the past for not having savings. I am really trying to get past that.

[hlburi]

That's interesting information radi8. I should have known you'd have the skinny. (yes, that IS shameless sucking up to one of the bosses)

 

I still wonder how many people are actually putting money aside - whether in a 401k or 403b, or a bank account, or any kind of investment, really. I would think that if one is looking for some kind of return, a bond would be okay. I'm not sure, but I do know that I have had the *#$( kicked out of me in the past for not having savings. I am really trying to get past that.

 

start small. It will add up fast.

[Certified Credit Counselor]

 

savings not investments. what is the average SAVINGS APY???

 

and where did I say anything about a HOUsE?????

 

(BTW we've had 105% appreciation in 4 years on our home, my stocks have not done that well).

 

Savings ARE Investments. Investments are Savings. ToMAYtoes...ToMAHtoes...

 

 

Actually,

 

The two should not be considered the same! The big difference is time and application.

 

Savings - Setting aside funds from a current income source to achieve small to medium term savings goals. Saving is a "short term parking spot" for your cash. (setting aside money to pay cash for a Plasma T.V or building up an emergency fund of 3 months' expenses would be an example of saving)

 

Investments - Set aside funds for potential growth for FUTURE income and Considerable Net Worth. Investments are "long term parking spots" for the hopes of replacing your current income source in the future. Investments are also typically not as liquid as a savings product would be, thus possibly assisting in higher returns.

 

You won't hear too many people call in to a financial advisor and tell him/her that they are ready to retire off their retirement funds resting in savings accounts!

 

 

BTW.... I totally agree with Hegemony..

 

Real Estate... not just termed as a house... has way out trumped Stocks!! Personally my family has made significant ROI's of 400% in a 6 month time period by flipping real estate! However, stocks did make a significiant contribution in providing the opportunity for real esate investing!

[radi8]

I still wonder how many people are actually putting money aside - whether in a 401k or 403b, or a bank account, or any kind of investment, really

 

 

http://www.financialservicesfacts.org/fina...e_sort_657220=2

 

That'll give you a rough idea what % own mutual funds and have other types of savings and investments.

 

 

For example, families that own one or more mutual funds:

 

[hlburi]

I consider my investments as savings.

 

As for the house thing, while YOU may have made money flipping houses (and I am not denying people have done it), there are many people who have tried who have not been able to do it and then they are stuck with two mortgages.

 

If your house appreciates at a rate of 4% per year, and you can make 12 to 20 % in the stock market, then yes, housing is not the best investment out there (as many people are led to believe).

 

It beats renting but is not necessarily the best investment. Which is the point I was trying to make.

[blueskeet]

I think not only do people buy more house than they need, but builders don't make starter homes anymore, especially where I live. I don't know why they consider 2600 sq. ft. house a "starter." All the smaller homes are being snapped up like crazy and over-valued as well.

[GEORGE]

4 OF THE MANY REASONS PEOPLE DON'T SAVE MORE MONEY

 

1) INTEREST IS TAXABLE INCOME

 

2) YEARS AGO THE FIRST $200 WAS NOT TAXED

 

3) LIVING PAYCHECK TO PAYCHECK

 

4) THE APR YOU GET IS A JOKE

 

WHAT EMERGENCY IS ONLY PAYABLE WITH CASH???

 

(other than DRUGS)

Edited June 21, 2006 by GEORGE

[Athena53]

While the government calculation of savings may be afulty, there have been other stories about retirement planning that are pretty hair-raising. Over half of people who respond to polls say they're confident they'll have enough money during retirement. And fewer than half of people 50 and over have more than $50K saved. My amateur opinions about why people are spending more than they make, or close to it:

 

1. More goods and services that people consider part of a "normal" life. New clothes every year, a closet full of shoes, new cars that cost a bigger multiple of the average salary than they used to, cable TV, cell phones, frequent meals at fast-food places. A bedroom for each kid and a car for each teenager with a license. People just didn't spend like that 30 years ago. Now it seems normal.

 

2. An increasing reliance on "the government". Guess where "the government" gets its money.

 

3. Student loans weighing down your early years.

 

4. Ignorance of compound interest- the idea that you can wait to save for retirement till you're in your 50s.

 

5. The assumption that you'll get a nice pension from the job. Those are few and far between.

Edited June 22, 2006 by Athena53

[soldiergurl74]

No matter what rate % rate of return you get, why are people so opposed to putting money away for a rainy day?

 

It is baffling to me that some are equating saving money as wasting it, because they can get better returns elsewhere.

 

My husband and I learned this lesson, and reinforced my views the first time his pay got screwed up, and he didn't receive a paycheck. Thank GOD we had the equivalent of one month of his pay in a savings account. It paid for itself right there, and we were able to pay our bills WITHOUT BORROWING more money.

[radi8]

While the government calculation of savings may be afulty, there have been other stories about retirement planning that are pretty hair-raising. Over half of people who respond to polls say they're confident they'll have enough money during retirement. And fewer than half of people 50 and over have more than $50K saved. My amateur opinions about why people are spending more than they make, or close to it:

 

1. More goods and services that people consider part of a "normal" life. New clothes every year, a closet full of shoes, new cars that cost a bigger multiple of the average salary than they used to, cable TV, cell phones, frequent meals at fast-food places. A bedroom for each kid and a car for each teenager with a license. People just didn't spend like that 30 years ago. Now it seems normal.

 

2. An increasing reliance on "the government". Guess where "the government" gets its money.

 

3. Student loans weighing down your early years.

 

4. Ignorance of compound interest- the idea that you can wait to save for retirement till you're in your 50s.

 

5. The assumption that you'll get a nice pension from the job. Those are few and far between.

 

I think you're exactly right on all 5 points. The number of people who have inadequate retirement funds is staggering.

I think there is a faulty belief that SS and medicare will be sufficient and what's still needed can be funded by working a couple part time hours weekly if necessary.

In fact the "benefits analysis" thing I get yearly from the SS administration paints a fairly comfortable picture- according to that I will receive about 70% of my current income in SS benefits alone after retirement. Problem is, that's today's dollars 25 years in the future- inflation will reduce that benefit to considerably less...assuming it's still around and unaltered.

[mellowmarshall]

In agreement with the statement about SS...my current gf's grandparents are about to move in with their daughter and son-in-law because they can't afford to continue renting the house they live in. Their rental payment is cheap, they live alone, food and utilities are basically their only expenses and they have no spare cash. They didn't put money into any retirement and now they are suffering under increasing medical bills, forcing them to move in with their daughter.

[orangecrush]

I think many people have gone old school with savings and keep a chunk of cash in the house.

[Ocean]

While the government calculation of savings may be afulty, there have been other stories about retirement planning that are pretty hair-raising. Over half of people who respond to polls say they're confident they'll have enough money during retirement. And fewer than half of people 50 and over have more than $50K saved. My amateur opinions about why people are spending more than they make, or close to it:

 

1. More goods and services that people consider part of a "normal" life. New clothes every year, a closet full of shoes, new cars that cost a bigger multiple of the average salary than they used to, cable TV, cell phones, frequent meals at fast-food places. A bedroom for each kid and a car for each teenager with a license. People just didn't spend like that 30 years ago. Now it seems normal.

 

2. An increasing reliance on "the government". Guess where "the government" gets its money.

 

3. Student loans weighing down your early years.

 

4. Ignorance of compound interest- the idea that you can wait to save for retirement till you're in your 50s.

 

5. The assumption that you'll get a nice pension from the job. Those are few and far between.

 

I think you're exactly right on all 5 points. The number of people who have inadequate retirement funds is staggering.

I think there is a faulty belief that SS and medicare will be sufficient and what's still needed can be funded by working a couple part time hours weekly if necessary.

In fact the "benefits analysis" thing I get yearly from the SS administration paints a fairly comfortable picture- according to that I will receive about 70% of my current income in SS benefits alone after retirement. Problem is, that's today's dollars 25 years in the future- inflation will reduce that benefit to considerably less...assuming it's still around and unaltered.

 

 

I don't consider SS into my equation of retirement....because its just extra change....not enough to even consider IMHO.. not enought to live on.....Its kinda ashame of all the money you put into it....you get very little return...and those that dont put into it....can receive its benefits....I don't understand....maybe that should be discussed over on PF...

[Ocean]

I think many people have gone old school with savings and keep a chunk of cash in the house.

 

I wouldnt go that far....I would keep it in savings or somewhere else that can be accessed easily.....Starting to think the old school of way is better then the new....and I am not old...I dont think I am at least..

[hegemony]

While the government calculation of savings may be afulty, there have been other stories about retirement planning that are pretty hair-raising. Over half of people who respond to polls say they're confident they'll have enough money during retirement. And fewer than half of people 50 and over have more than $50K saved. My amateur opinions about why people are spending more than they make, or close to it:

 

1. More goods and services that people consider part of a "normal" life. New clothes every year, a closet full of shoes, new cars that cost a bigger multiple of the average salary than they used to, cable TV, cell phones, frequent meals at fast-food places. A bedroom for each kid and a car for each teenager with a license. People just didn't spend like that 30 years ago. Now it seems normal.

 

2. An increasing reliance on "the government". Guess where "the government" gets its money.

 

3. Student loans weighing down your early years.

 

4. Ignorance of compound interest- the idea that you can wait to save for retirement till you're in your 50s.

 

5. The assumption that you'll get a nice pension from the job. Those are few and far between.

 

I think you're exactly right on all 5 points. The number of people who have inadequate retirement funds is staggering.

I think there is a faulty belief that SS and medicare will be sufficient and what's still needed can be funded by working a couple part time hours weekly if necessary.

In fact the "benefits analysis" thing I get yearly from the SS administration paints a fairly comfortable picture- according to that I will receive about 70% of my current income in SS benefits alone after retirement. Problem is, that's today's dollars 25 years in the future- inflation will reduce that benefit to considerably less...assuming it's still around and unaltered.

 

 

I don't consider SS into my equation of retirement....because its just extra change....not enough to even consider IMHO.. not enought to live on.....Its kinda ashame of all the money you put into it....you get very little return...and those that dont put into it....can receive its benefits....I don't understand....maybe that should be discussed over on PF...

considering I won't get SS (because I do not pay in) I also think SS is an illusion for a lot of people. Saving for your own retirement (and starting that savings early) is the only way to ensure some level of living in retirement.

[cljohnr]

I think there is a faulty belief that SS and medicare will be sufficient and what's still needed can be funded by working a couple part time hours weekly if necessary.

In fact the "benefits analysis" thing I get yearly from the SS administration paints a fairly comfortable picture- according to that I will receive about 70% of my current income in SS benefits alone after retirement. Problem is, that's today's dollars 25 years in the future- inflation will reduce that benefit to considerably less...assuming it's still around and unaltered.

I don't consider SS into my equation of retirement....because its just extra change....not enough to even consider IMHO.. not enought to live on.....Its kinda ashame of all the money you put into it....you get very little return...and those that dont put into it....can receive its benefits....I don't understand....maybe that should be discussed over on PF...

Ditto for me. I'm 29 and just assume I won't get anything by the time I'm eligible, and I plan accordingly. I'm not quite up to maxing out both my 401k and a Roth, but I'm pretty close. The money comes out before I get my check, so I've never had it to miss.