During the height of the real estate bubble back in 2005, the US personal savings rate dipped into negative territory for the first time since the Great Depression (which is a flawed statistic in the modern era, but that’s another article). What that means is consumers simply spent more money than they earned, relying on debt and rising asset prices to make up the difference.
This election season, political candidates from both parties haven’t hesitated to blame Wall Street, the president, and the Federal Reserve for our current economic crisis. While those entities may very well share part of the blame, by far the largest contributer to the financial crisis has been the tendency of all Americans, rich and poor a like, to live beyond their means. In short, we haven’t been saving. Sure, complex and unregulated financial derivatives have made it possible for firms to blow up far more spectacularly as a result of their imprudence, but it is their imprudence that is the root of the problem, not the aforementioned derivatives. No amount of financial regulation will either solve this crisis or prevent another like it. Only a return to our nation’s frugal roots can do that.
Americans Saving More, Paying Down Debt
Fortunately, everyday Americans seem to be getting the message. A new study by First Command Financial Services finds that short-term saving for American households earning $50,000 or more (skewed towards the upper half of the income distribution, but still telling) is up 20% over last month. Furthermore, those same households have bumped up their retirement savings a full 54% over the same period, presumably in an attempt to take advantage of depressed equity prices. That’s quiet a significant boost. Meanwhile, the amount of money funneled by these households to pay down debt increased a more modest but still significant 6%.
What does this tell us? Yes, it tells us Americans are frightened and pessimistic about the economy. It tells us they are cutting back. But it also tells us they finally “get it.” We can’t borrow our way out of this mess. We’re just going to have to go back to doing things the old-fashioned way: if you can’t afford to buy something, save money until you can.
Elegant in its simplicity.
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6 responses so far ↓
1 Amber Jones // Oct 29, 2008 at 9:29 am
Yes, it looks like many are “getting it” but let’s just hope they “keep it”.
2 Mr. ToughMoneyLove // Oct 29, 2008 at 11:21 am
Good news indeed but I am afraid it won’t last. After all, the government is all about boosting spending and credit flows to get the economy cranked up again.
3 Curt // Oct 29, 2008 at 12:31 pm
Yes, but the government doesn’t get it.
4 Nightly (Value) Investment Links#9 | Simoleon Sense // Oct 29, 2008 at 9:14 pm
[...] 6. Surprise: Americans Actually Begin Saving Money - Via Amateur Asset Allocator [...]
5 Maria // Nov 12, 2008 at 4:58 pm
I finally read something about taking responsibility. We are part of the problem and we should also be part of the solution.
6 Sonya // Jan 1, 2009 at 4:12 pm
What a wonderful, novel concepts - saving money and not buying something until you can actually afford it. I live like this anyway. It may take longer but I love the feeling of walking out of a store having bought things that I own outright not on credit. Hopefully people will stick with this way of living.
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