What’s Up With The Negative Savings Rate?

According to the Orlando Sentinel staff writer Richard Burnett in his article, “Americans spending more, and saving . . . nothing“, Americans are not only failing to save money for the future, they are actually spending heavily enough to dip into their existing savings or home equity. In his article, he states that the savings rate for last year, -0.5%, (yes, that is a negative savings rate), is the third lowest in U.S. history. The experts’ take on this willingness to spend beyond our means is that rising home values have given Americans a false sense of financial well-being.

I suppose the reasoning would follow something along these lines:
– Mr. Smith bought his home for $150,000 four years ago.
– Thanks to the real estate boom, his home is now worth $250,000.
– He is now $100,000 richer, even though he has no emergency fund or savings.

I remember reading in Rich Dad, Poor Dad that popular “assets” such as a home that serves as a primary residence don’t really count as an asset as you gain no income from it unless you are living in just one bedroom and renting out the others for a high enough rate to turn a profit after the mortgage and other bills are paid. In practical terms, Mr. Smith won’t see that $100,000 he thinks he has unless he sells his home and moves into another home that costs $150,000. If he upgrades to a $250,000+ home with the profits from his original home’s sale, he still doesn’t have any more disposable income than he did when he started. Because home values *have* gone up, homes in the $150,000 range would now be a downgrade from his just-sold property unless he also moves to a cheaper part of the country.

Because of this, I prefer not to count the value of my home or any other possessions in my calculation of my net worth. (All right, I don’t actually OWN my own home yet, but when the prices level off I’m sure I’ll be pulling out my VA home loan guaranty paperwork and going home shopping.) With the notable exception of real estate, most purchased items have a resale value that is significantly lower than the original price paid. I just stick to adding up what I have in my IRA, 401(K), savings, and checking accounts each month after the bills are paid and the credit card balances are subtracted, if applicable.

Burnett’s article is about personal savings. I am not clear as to whether this includes retiremement accounts or not, but since he seems to cover both an emergency fund for lean times and a nest egg for future retirement, I’ll assume that he’s talking about both types of savings.

I don’t know about you, but as a single working gal with no dependents, I don’t think there’s been a single month I haven’t been able to at least set aside the maximum monthly contribution for my IRA account since I was a 21-year-old Private First Class pulling in just $11,000 a year. Currently, I am still maxing out my Roth at $333/month, putting aside 4% of my gross income into my 401(K) to get the maximum company max, and saving $200/week into my Emigrant Direct savings account (4.25% APY!) until I hit my $10,000 emergency fund savings goal. After that, I’ll be dumping the extra $200/week back into my 401(K) to the maximum 15%.

Am I deprived of all amusements and eating nothing but rice and beans in order to save $1333 per month?

Hardly.

I eat six (yes six) great meals a day, pay for a monthly gym membership, pick up new clothes when I need them, pay for my cats’ food, supplies, and veterinary fees, go to movies, acquire new video games and software periodically, replenish art supplies, go a bit nuts ordering gardening stuff, purchase books and music, pursue hobbies that interest me, hang out with friends and allot enough money for gifts and vacations.

What I don’t do is lose track of how much I can afford to spend once my living expenses and savings contributions are taken out of my paycheck.

And here are some of the other things I don’t do or buy–no doubt some out there would consider these examples of deprivation, but I can’t say that I’ve even noticed their lack…

– I don’t drink alcohol, except for free wedding reception champagne, and most of the time I just pretend to sip and go back to water. Champagne…blech!
– I don’t use tobacco in any form.
– I don’t get a new car every three years, or even every ten years. I drive my Hondas until the bolts start falling off and I have to keep the car moving by running with my feet through the floorboards a la Flintstones, many many years after the vehicle is paid off. Then I buy another gently-used Honda for several thousand dollars less than what the original owner paid for it new. :whistle:
– I don’t make major purchases without entering a test item in my personal finance program to see if I can actually afford it.
– I don’t eat out more than once or twice a month. This entails a lot of cooking, but I kind of enjoy the sense of self-sufficiency that being able to prepare my own meals gives me.
– I don’t drink much else besides Brita-filtered water.
– I don’t pay full price for anything unless I have no choice. This includes groceries, clothing, electronics, media, travel, restaurant meals (the Entertainment coupon book is my friend here), fitness gear and supplements, medications, and even kitty litter.
– I don’t upgrade unnecessarily (too much) anymore. I try to use things until they are beyond any reasonable expectation of repair or duct-tape patching. This is one I’m still working on since I still feel tempted to upgrade graphics software and computer hardware annually.
– I don’t pay bank fees or interest on carried revolving credit balances.
– I don’t buy premium cosmetics, hair products, jewelry, clothing, or other major luxury items.
– I don’t acquire new books, games, and gadgets without first assessing what I have, if I really need/want the new items, and if I can offset the cost by selling the stuff I already own.

My ultimate goal is to live well in the present but retire with a tidy 2 million dollars or so in my retirement account to support me very comfortably for the next 30+ years and a home that is completely paid off. Where else, after all, am I supposed to put my posh home gym, invite my young Hugh Jackman-lookalike personal trainer, and raise the 30 or so cats I expect to have acquired by age 65?

Just kidding!

About the cats anyway…

11 thoughts on “What’s Up With The Negative Savings Rate?

  1. I know you’ve said you’ve always been frugal, but do you mind me asking how your finances were when you were in your early 20s, despite the contribution to the Roths?

    I’m curious, since I’m in the process of doing a financial overhaul in my life.

  2. Shawn–I’m not sure if my experience would be much help since there were some unusual circumstances at work for me back then.

    I was pretty lucky in my early 20’s. After leaving school my junior year, I only owed something like $3000 on a Perkins loan since I received significant need- and academic-based financial aid at Rice. Since I joined the Army just a few months later, I was able to pay off my school loan before I even turned 23.

    The military further covered my housing, food, medical, dental, travel, and work clothing expenses as well, so I never had to deal with that from 1996-2000. That meant that nearly 100% of that $11,000 of E-3 pay was disposable income. And when you are living in a barracks room with just a wall locker for storage, there is only so much you can buy. I also did not own a car those 4 years.

    I got through my early 20’s without carrying credit card balances for more than a month or two, and even that was pretty rare. Given my circumstances, it was pretty easy for me to put money into my IRA and even invest the excess in some regular mutual funds since I didn’t have the option to save in a 401(k) back then.

  3. And, of course, it helps to have a relatively high-paying job (and by doing some backwards math and filling in a few blanks … you qualify!). Someone who makes, say, half of what you make will still have comparable expenses and not be able to save proportionately what you’re able to save. In other words, they’re not going to be able to spend half of what you do for the same staple items (gas, food, insurance, home maintenance, etc). They’ll get them at the same price as you.

    Never mind that you don’t have a mortgage. Granted, with a rental you have none of that pesky equity but you’re not responsible when the air conditioner konks out in July, either. They’re not a wash, but I’d rather the latter be someones else’s problem to fix. πŸ˜‰

    While I don’t mean to suggest you shouldn’t be applauded for your accumen and talent — because you should … and i do applaud you — I’d say you’re fortunate all the way around.

  4. Shawn–If you are looking for a good read on personal finances for a person just starting out, I’d recommend Suze Orman’s Money Book for the Young, Fabulous, and Broke if you haven’t already picked it up. It covers debt repayment, student loans, career starting moves, home and car buying, investments, retirement savings, and even how to split the bills with your significant other.

    Rob–Trust me, I realize how lucky I am (in a multitude of ways) every day though now that I’ve moved into my boyfriend’s house I wind up splitting many of the home maintenance expenses without having any stake in the equity. Ah, for the days when apartment maintenance staff would come and change my AC filters for me every month!

    πŸ™‚

  5. How do you do this

    “I donÒ€ℒt pay full price for anything unless I have no choice. This includes groceries, clothing, electronics, media, travel, restaurant meals (the Entertainment coupon book is my friend here), fitness gear and supplements, medications, and even kitty litter.”

    Coupons ?

  6. Just as an aside to Rob….I think it’s not how much people save, just that fact that some people not only save nothing at all, but actually save -.5%. It’s all about living within your means.

    Maggie may be well situated with a high paying job so that she can not only contribute vast (to me) sums of money into savings, but also have enough to buy new clothing, hobby items, and vacation…..but the fact is, whether you have a high income or a low income, it’s all the same principal. The statistic isn’t that “poor people don’t save, but rich people do”…it’s that *americans* aren’t saving, regardless of income.

    Maggie could be squandering away all of her earnings and then some as some people do, but she’s not…and *of course* it’s to be applauded. If you’re saving -.5% right now, then having a bigger income isn’t what you need…you need better managment skills. Like the old saying goes….rich people have the same problems as poor people…just with more zeros behind them.

    My family of four earns 18,000 (gross) in orange county, CA. We also get rent and some utilities paid (no phone)….which brings our estimated gross income to about 30,000 a year. Out of that, we pay 10% off the top (gross) to charity and another 12% in taxes. Out of what’s left over we manage to live on.

    We eat very well (as I refuse to put our health down the toilet with processed foods), have a car (a well cared for 1995 geo metro), meet all of our daughters needs, own a decent computer, and both my husband and I get to have a $25.00 a month personal allowance.

    We have no credit card (based on personal beliefs) and live on cash (I only use my bank card to pay bills). We have absolutely NO debt whatsoever, and manage to save about 1,300 dollars a year….all without ever feeling truly “squeezed”. And if you count the 10% of gross we pay to charity each month as money saved as well (we’re christian and pay tithe…most people don’t and would keep it for themselves)….then we are saving 14.3% of our gross income.

    I guess that some people may consider how we live “deprived” (no new car, no vacation, our clothes get worn until they’re thread bare, only one piece of furniture in our apartment was actually bought (and it was on clearance), we eat out only about once every 3-4 months, etc), I buy generic….and on and on.) But frankly, we feel like all our honest needs are being met.

    People just need to live within their means. And if you’re not happy doing that, then increase your means!

  7. Lara … I never said it was impossible for someone who makes less to save and that the same principles don’t apply to all — only that a single, high-earner with no mortgage or children comes by their financial choices with a little more freedom than a single person with no children or mortgage but who makes half as much. The issue was relativity … not the ability to save nor the amount of the savings.

    Saving is an ethic … a behavior. Like anything else behavior-related, it takes practice.

  8. Vital – I don’t use coupons much for groceries since they are usually only issued for processed foods that I don’t use anymore, but I DO scan the weekly ads online for three different grocery store chains in my area for the best bargains on the staples I always buy: fresh veggies and fruits, chicken breast, lean beef, oatmeal in a can, tuna, eggs, plain yogurt, frozen veggies, salsa, and the like. I do the same for pet supplies and food and vitamins (drugstore ads) or other over the counter medications.

    For cds and books, I am a big fan of Half.com and used bookstores. I usually shop for electronics and supplements online, so I have a throwaway email account that I use to sign up for special offers and sale notices from online merchants. I use the coupon codes I find through the emails and on Jumpondeals.com, Slickdeals.net and Bensbargains.net to bring my totals down when I do order. I also wait for Internet sales on travel and make sure I price any trips I take (rare as they are) at Expedia.com, Orbitz.com, and Travelocity.com to make sure I’m getting the best deal.

    In case my boyfriend or visiting friends want to go out to eat, I picked up an Entertainment coupon book (on sale, of course, LOL) which provides hundreds of two for one entree coupons for restaurants in my area as well as a variety of discounts on entertainment venues, services, and retail shopping.

    As for clothing…Love those clearance sales, thrift stores, and fabric remnant piles!

    Lara–I agree. I believe that anyone can save *something* each month no matter what their income level is. It really does boil down to living within your means at every stage of your life. Your family sounds a lot like mine as I was growing up, and I never, ever felt anything was lacking just because we never ate out, got clothes from the mall or went on big family vacations. I liked my parents’ cooking better than any restaurant food anyway. πŸ™‚

  9. Do you have any tips for people visiting Florida? We booked our trip online at Expedia at one of the cheapest hotels that had all of the features we were looking for. (I looked at some of the 4 star hotels, and, honestly, I’d be uncomfortable with the marble-filled lobby and all that stuffy furniture.)

    If you haven’t tried hotwire.com, give it a whirl. If you’re not on a tight schedule, you can save some big money. You can book a really cheap flight, but they don’t tell you what time it leaves until 24 hours before departure. You can book a four-star hotel for the price of a two star, but they don’t tell you which hotel it is. I wanted to book with them, but my husband doesn’t have quite the sense of adventure that I do.

    I’m somewhat familiar with the Entertainment book, as I used one all through University. Do you think I’d get my $20 worth out of it in just 7 days? What is the free $25 restaurant certificate? Is it available for purchase anywhere other than online?

    http://www.entertainment.com/discount/change_location.shtml?search_findsavings_from=local&location=Orlando%2C+FL&submit.x=64&submit.y=18

    My family is planning on eating at McDonald’s and Pizza Hut for a lot of our vacation. I’m planning on bringing my peanut butter with me, keeping a nice stash of yogurt in the hotel mini fridge, and carrying a big box of cereal with me to supplement my meals with. I’m sure I’ll find salads and stir-fries somewhere.

  10. Guava–When are you getting into town? You are welcome to dig through my Orlando Entertainment book for any coupons your family might want to use on your trip. I never use the majority of the fast food or restaurant coupons. PM me on the JSF forum if you want to meet up after you arrive. I work near the attractions/resort area of Orlando; if your family is staying at a hotel in the Universal/Sea World/Disney area, I can easily meet you during my lunch break.

    I believe the Entertainment book is also sold in drugstores and such, but I can’t confirm it for sure.

  11. We’ll arrive on the 15th. I’ll send you a message later on. See you in a couple of weeks!

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