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June 29, 2009

Americans Are Saving More

image004-300x176The American savings rate continues to climb.  For the last two decades, the savings rate hovered around zero percent.  Now, it has leaped to over 6%.  The recession and the credit freeze seem to be the turning point.  But, is this change in the savings rate temporary?  That is the big question.  Economists are concerned that without a spike in consumer spending, the economic recovery will be less robust.

While the overall economy might suffer a bit from a more restrained consumer, your personal economic recovery will benefit from your increased savings.  Fifty years ago, the American savings rate was 12%.  During the recent economic boom times, more and more people stopped saving and increased their consumer debt.  Credit cards became ubiquitous.  People refinanced their mortgages, taking equity out of their homes, spending it on consumer products.  Businesses too, got caught up in the credit frenzy, over leveraging their books.  Now, both individuals and businesses are cutting back.

Americans are going back to basics.  They are paying off debt and increasing their savings.  Ben Franklin was quoted as saying, “that a penny saved is a penny earned”.  That is good, old fashion common sense.  We need to save for rainy days.  But, Franklin did not live in times with income and social security taxes.  In today’s environment, a dollar saved is more like a $1.30 earned.  After all, you must first earn $1.30 to net $1.00 after taxes.

Paying off debt is the best action anyone can make.  For every dollar of credit card debt you reduce, you save 18% – 20% in interest.  It is virtually a guaranteed return on your dollar.  Today, Americans are paying down debt at an increasing clip.

These changes in attitude do not seem temporary.  A structural change is occurring in our society.  Americans are remembering what is really important… family and friends… not possessions.  Flamboyant excess is out.  The virtue of “all things in moderation” has taken its place.

Does this structural change spell trouble for the economy?  If Americans continue to spend less and save more, that will likely slow the economic recovery.  But, capitalism needs capital as fuel for long-term growth. Over the last twenty years, American business relied on foreign investments as its capital source.  An increased savings rate will mean more “home-grown” capital sources for American business, which, in the long term, will be a positive for economic growth.

In summary, Americans increased saving rate might slow the economic recovery in the short term, but it produces positive benefits for the economy as a whole.  But, for your personal economic recovery, increasing your savings and paying off debt will reap nice rewards.  Financial advisors generally agree that a 10% savings rate is the benchmark.  This rate should increase as you approach retirement.  The key to saving is to pay yourself first.  Put your monthly savings ahead of all your bills, and then you can spend whatever is left.

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