The U.S. personal savings rate increased to 4% last month. It is shameful that the number of 4% can be described as an increase in this country. How is it possible that we are saving so little as a nation? With our social safety net in such shambles, with unemployment near 10% and with more or less guaranteed cuts to social security in the coming years, does anyone truly believe that saving 4% of their income will be sufficient to protect them from financial disaster or will be enough to meet their needs in retirement?
Alpaca and I max out our respective 401K's, which is probably still not enough, and we are trying to save as much as we can in after-tax funds. Yes - there is such a thing as saving too much, with the risk being putting your life on hold to pay for some undetermined future event, but everyone needs to have a significant amount of money set aside in case of unforeseen disaster (not to mention as insurance against spending your senior years as a Wal-Mart greeter).
I am not saying we should save 30% or 40% of our national incomes like they do in China or India - that's not even a realistic (or desirable) goal - but isn't something like 10% a target we should aim for?
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17 comments:
I am not saying we should save 30% or 40% of our national incomes like they do in China or India - that's not even a realistic (or desirable) goal
How do you know? Have you run the numbers?
When I sat down and ran the numbers (this was many years ago), I was amazed. There are millions of people who would find out that they could retire at very early ages if they ran the numbers. But they just never do. And they assume that saving 30 percent is "unrealistic."
If you could achieve complete financial freedom and thereby be able to do whatever you wanted with the rest of your life -- would it then be realistic to save 30 percent?
Please understand that it's not my intent to pick on you, Shadox. I am just trying to share my experience. I thought that lots of stuff was unrealistic too until I actually checked it out. And then I ended up being very glad that I did.
Rob
Rob - for me, it's not a running the numbers thing. It's a matter of personal choice. Putting your life on hold in the hopes of expediting retirement just doesn't seem like a good trade-off.
I gotta agree with Shadox. While retiring early would be really great, I want to do fun stuff with my money now, in the prime of my life, while I can still enjoy it fully.
There are also significant impacts for our national economy for savings rates. If everyone in America starting saving 40% of thier income now, I bet we'd never get out of the recession... the economy runs on credit and moving money. During good economic times, we should move to save more as a nation. But in a recession, we need to spend, spend, spend.
I agree it is a shame. When did saving become a bad thing? As Americans it is sad that we desire that instant gratification so much that we will plung ourselves and our familes into financial ruin just to feed our desires.
Kim - spending in a recession may make sense for the economy as a whole, but for an individual it's a horrible idea. Just as your job is at risk, and your investments are probably losing value, spending more is a really dangerous thing to do. Wouldn't you agree?
What is dangerous for the economy as a whole is dangerous, then, for the individual. Enlightened self interest, call it. Sure, a few individuals can adopt "better" habits while not destroying the commons for everyone, but that's the thing about the commons... each deviation is a chip. And once its gone, there's not much to be done.
Kim - the problem with your argument is that you assume that your individual decisions have an impact on the economy as a whole. Realistically, individual decisions are too small to effect the whole market, and while you are right that this is a "tragedy of the commons" logic, I will ALWAYS make the bet to protect my own family than gamble that everyone will choose to act altruistically and spend in a downturn to save the economy.
In fact - I will argue that this is the rational thing to do, and that this is exactly why government intervention is needed. They are artificially create money from thin air (it's called printing), or by running a deficit which they will (hopefully) cover later, when the economy has recovered.
It's like the logic for voting. Statistically, the odds that your vote will have any impact at all whatsoever on anything but very local races is absurd. Yet, there are many who say people should vote anyway. It's not exactly the same, but I think the parallel warrant some investigation.
And it is precisely because you aren't spending that you can't spend, in a way. As long as we rely on people to do the wrong thing, as they so often do, we can feel better about doing it ourselves. And that adds to the problem. Of course you can't argue that people should act in a way that benefits the community rather than the individual because you yourself cannot or will not. I'm not saying you're a bad person or anything, but I personally find it difficult to be stingy at a time when I know spending is what needs to happen for everyone to be OK, even if I know that my personal dollars will not lift us out of recession.
Actually, Kim, this is the exact opposite of voting. When voting you have upside, BU. Very little risk when casting your vote. With spending your money in a recession, you have very little upside - since your impact on the economy is negligible - but a LOT of risk. If you lose your job, and draw down your savings, you may lose your house - the economy will not come to your rescue because you spent your money trying to support the economy...
Thanks for recognizing I am not a bad person, btw... :-)
Well, if I thought you were that bad, I wouldn't read your blog. :)
And just to be snarky, there IS a significant upside to spending... you get stuff. Stuff that you can enjoy.
OK. I'll concede that last point... :-)
I am not saying we should save 30% or 40% of our national incomes like they do in China or India - that's not even a realistic (or desirable) goal
Why Not? What makes you think that they don't enjoy life with such a saivng rate. It might be just different priorities of life.
Hey, I don't object. You want to save 30% or 40%? Good for you.
My opinion is that money is there for spending. What's the point of having cash in the bank if you are not going to enjoy it?
Of course, you need to make sure that you'll always have enough for your real needs and security - that's where saving comes in. It's all about smoothing consumption between feast and famine years.
Exactly. I agree with u. As China and India are developing countries with almost negligible(read big NO) social benefits from govt., they understand that they themselves have to save for everything. Thats why they have this huge savings rate. Plus there is culture difference. Just for example, In india, we still have joint families, which gives more room to save money.
And just for the record, even lower middle class Indians can afford domestic help at home.
This is not say one is better then others. All I want to put across is circumstances are different for us in India/China then u guys have in USA/Canada. Don't be prejudiced.
I like your blog. Reading ot from long time now. May be first time something probed me to post a comment.
Thanks for being a reader!
I don't think I'm being prejudiced. I keep saying - do what you think is right for you. My point is that as a nation, the U.S. does not need a national savings rate of 30 or 40%. Some individuals here feel they need that much? Good for them. People in other parts of the world need that much because of insufficient government safety nets? Fine with me.
For Alpaca and I, 20% or so is what we are targeting. Most of that in 401K savings.
The best way to ensure that your retirement is everything you want it to be is to start planning early. It is never too soon to start.
The best way to ensure that your retirement is everything you want it to be is to start planning early. It is never too soon to start.
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