The U.S. personal savings rate dropped down to 2.6% in the fourth quarter of 2018. But hey, it was only 2.4% in 2017. So that’s something, right?
No, no it’s not.
Because consumer credit has also been rising. In fact, it rose to $3.83 trillion — that’s trillion — at the beginning of 2018. That doesn’t include mortgages or even home equity loans.
Unsurprisingly, consumer debt has been rising too. It hit an all-time high of $13.2 trillion — again, trillion — in early 2018. Of that, student loans account for $1.5 trillion, and mortgages clock in at a whopping $10.3 trillion.
Credit where credit is (over)due
But for me the scariest numbers are the ones from credit card debt, courtesy of this article.
It turns out that 44% of credit card users carry balances. And in case that number doesn’t impress enough, know that 26.5% of accounts are dormant, which means that fewer than 30% of all credit card balances are paid in full each month.
That leaves $687 billion in debt carried by 44% of credit card users. Which is probably why 2018 saw $104 billion in credit card interest and fees. How can anyone save amid that?!
Of course, there’s no way to account for how many of those people who got into credit card debt out of necessity — people who live carefully but still can’t always cover unavoidable costs. Nor do these numbers tell us how many of the balance holders have reformed their spending ways and are diligently trying to pay down debt, though I assume they make up quite a chunk of the 26.5% of dormant accounts.
The one spot of good news here is that deliquency payments are staying quite low — under 3% actually.
Give me some credit
It’s important to note that credit cards aren’t the enemy, especially not for savings.
I use rewards cards regularly. It’s how Tim and I went to Seattle for our anniversary a couple of years ago. A hotel rewards card mean that I can afford to go to D.C. a few days before FinCon and sightsee. And of course anyone struggling with credit card debt should look into balance transfers onto a card with a 0% introductory offer.
No, credit cards can be excellent tools to save money. But mishandled tools can cause serious damage, and in this case the damage you’re inflicting is to yourself: damage to your credit score, your budget, your spending power and, perhaps most importantly, your ability to save.
So yes, credit cards, while they have the potential to be incredibly beneficial, can be dangerous. So dangerous that they’re helping millions of people get and/or stay in debt.
Still, credit cards can’t be the sole cause of the low savings rate. Too many people do pay their bills off in full each month, and even people paying off debt tend to build emergency funds.
So what gives?
Home not-so-sweet home
Well, part of the problem is the housing situation. House values are rebounding, meaning that mortgages are necessarily going to be bigger. Specifically, the average for a new mortgage is more than $260,000.
Meanwhile rent hasn’t been decreasing either. Even here in Phoenix, which has a low cost of living, a one-bedroom apartment can easily set you back $700 to $800. Compare that to the $700 two bedroom apartment Tim and I lived in when we moved here nine years ago. And that included utilities!
So the cost of living is rising, and wage stagnation isn’t helping either.
But we also simply didn’t learn our lesson (or didn’t learn it long enough). As far back as 2010, we were already forgetting our newfound prudence. According to an article from American Banker, there was a two-year study of 4,300 people whose adjustable rate mortgages’ rates dropped. Rather than saving the difference in mortgage payments, on average the consumers actually spent 4% more than they saved.
That was just two to four years after the nadir of the recession. Imagine how much we’ve unlearned since then!
And this is a problem now that interest rates are on the rise again.
Arguably, higher rates will cause people to stop borrowing so much, leaving more money to save. And higher interest rates might convince more people to put money into savings accounts. (Though they’ll do best if they put their money in Ally with its 2% rate.)
But if they didn’t see the point of having more than 2.6% savings in the first place, I doubt interest rates were really the driving force behind purchase and saving decisions. No, I think we as a nation have brushed aside the lessons of the past because they’re unpleasant. And remembering unpleasantness isn’t nearly as fun as getting a nicer car or a big house.
Don’t get me wrong: We’re not going as crazy as pre-2008. But clearly spending is up, leaving little for savings. Of course, some of the spending is unavoidable, as food and housing costs have increased without necessarily a corresponding increase in wages. But that’s not enough to account for such a paltry savings rate.
A quick aside
As I judge the savings rate, I’m well aware that I speak from a position of privilege.
I get paid a fair chunk of money. Now that I’m divorced my expenses (including medical) are lower. I don’t have student loans. I work from home, so I don’t have to buy a lot of nice clothes — or a lot of clothes at all. And I don’t have children, meaning no daycare or school-related expenses. Those privileges mean that I may be able to save half my income.
Most people aren’t in that situation. There are people whose income and expenses mean that they genuinely can’t save — or can’t save much. I know this, and if you are in this situation please don’t think that I’m castigating you for circumstances beyond your control.
But there are plenty of people who could be saving more. Those are the people I’m upset by.
According to a pretty scary survey from the Center for Financial Services Innovation, 47% of the 5,019 Americans polled say their spending matches or exceeds their income. Of course, this includes people with low income and/or high expenses, but even without them that’s still got to be a very troubling percentage.
The study also says that only 28% of respondents consider themselves financially healthy — that is, not struggling with at least some aspects of their financial lives. And 36% are unable to pay all of their bills on time. It’s no wonder our savings are so low!
But part of the problem here may be self-inflicted. As in, we don’t know how many of the people with self-reported high expenses have put themselves in that situation. Rather than medical or student debt and rising rents, their expenses could include keeping up with the latest gadgets, high car payments on luxury cars, huge mortgage payments on overly large houses, ridiculous grocery bills (like the couple that bought $15 sushi for their son as a snack each time they went on a grocery run) and so on and so forth.
Unfortunately, the study didn’t differentiate between people with avoidable and unavoidable high expenses. It doesn’t even differentiate between people with low income and those with high expenses, which is an important distinction. So while the study tells us how vulnerable people are, it doesn’t tell us how many of them landed themselves there through carelessness or cluelessness.
Though I guess in the end it doesn’t matter much, does it? If you’re financially precarious, regardless of the circumstances, you’re simply not going to be able to save. Or at least, you won’t feel like you’re able to save. I suspect a large chunk of those polled could do with some lessons in frugality. That’d probably free up some funds for the ole savings account.
At any (savings) rate…
We need to step it up as a country. A 2.6% savings rate speaks to just how financially unhealthy Americans are as a whole. It also indicates just how big of trouble we’re in when bad things hit.
Just look at CFSI’s study. Not only do 72% of participants struggle with some aspect of their financial lives, 45% say they couldn’t cover three months’ worth of expenses. That’s a problem in any climate, let alone one where, say, 800,000 government employees are without paychecks indefinitely.
We need to make savings not just a priority in the personal finance community — that’s preaching to the choir — but in outreach efforts to educate the public. We need people to know that savings is feasible at many income (and expense) levels. We want them to know this not just during an “America Saves” week and not just during recession. We need the lessons to be heard loud and clear and to stick around long-term.
That starts with education in high schools about budgets and money management. It starts with more people demystifying frugality. And it definitely starts with nixing $15 sushi.
How do you compare to the national savings rate? Do you consider yourself financially healthy?