Quick: What is America’s national savings rate? If you guessed less than 5%, you’d be close, but the scarier figure reported by the U.S. government’s Bureau of Economic Analysis (BEA) this year was just over 2%. This precipitous decline in savings by Americans has been the source of a lot of hand-wringing especially when compared to their 10% savings rate just a generation ago. There was a brief period after the Great Recession when folks were saving at higher levels—up to nearly 9% according to BEA figures—because the market drop inspired a surge in debt repayment. However, the trend since then has been dismal.
The BEA went back to the numbers and realized that it had incorrectly calculated the U.S. savings rate since the beginning of 2002. The chart below plots its previous estimates (blue line) and revised ones (red line) which shows a relatively-consistent savings rate of 6-7% after the post-recession spike. The hand-wringing was not quite as necessary as we thought.
What happened? BEA researchers collect data from a variety of sources to determine American’s average income levels and average total expenditures. The difference is assumed to be the savings rate (if you earn it and you don’t spend it you must be saving it, right?). The revised figures came when the researchers took a second look at data coming from the IRS and realized that small businesses were not claiming their full income due to a variety of deductions they were entitled to take. That revision caused the aggregate savings rate to jump.
What does that mean? Are we saving enough? It means that 6% savings is better than 2% savings, but many people are still living precariously, saving far too little for emergencies and their future retirement. It also means that many business owners are doing much better than the government apparently realized and the economy has enough capital from savings to sustain it without fear of low savings contributing to a recession.
Unfortunately, the financial health of the economy overall and small business owners specifically will not help the average American pay for a new transmission, their daughter’s college tuition, or their own retirement. Only a disciplined savings strategy based on a foundation of spending less than is earned (10% is a nice starting point) will put the average American on the path to financial security.
If you’d like more on savings strategies, check out our previous blogs on emergency savings here, savings strategies for recent graduates here, and my financial love note to my daughters (full of all kinds of great financial tips!) here.
Enjoy and be sure to call if we can help you determine how much you should be saving to achieve everything that’s important to you—plus some for emergencies!