In his post yesterday, Richard talked about the remarkable decline in savings rates over the years. Inspired by this, I visited the St. Louis Fed’s website where they have an excellent graphing tool that lets you visualize the savings rate over time.
Below you can see a graph of savings rates in the US from 1959 to present. That’s the widest interval for which data were available.
As you can see, savings rates climbed from roughly 7.5% in 1959-1960 to 10% or more in the early to mid-1970s. But in the early 1980s things began to change as savings rates started to trend downward.
Yes, there have been some short-term reversals, primarily during recessions, but nothing sustained. And even when rates jumped back up during the Great Recession, they only made it back to mid-90s levels, around 5% (give or take).
But does that change look like it will last? Not to me. It looks like things are starting to trend downward once again.
Is this surprising? Not really. Given that the Federal Reserve has been working so hard to keep interest rates down, there’s not much incentive to save — at least not in a savings account. And borrowing is dirt cheap.
So, where to from here? My best guess is that savings rates will stay in the sub-5% range. The 2007-2009 bump was just an anomaly. But that’s all it is. A guess.
What do you think? Will savings rates rebound? If so, when? And what will drive the recovery? I’m curious to hear your thoughts.
Personally, I think you should attack the highest interest rate first. That higher interest rate would be driving me crazy. I accept that maybe other people would be more motivated to get rid of a bill first, but this method takes longer. Otherwise it sounds like a good plan. Thanks for sharing.
Plain and simple – people need to save more money or they are going to get themselves in trouble later in life. While saving can be a challenge given today’s economic circumstance, people need to be more disciplined and get their spending in order.
Inflation is killing consumers and their spending power. They cannot afford to save – as paychecks no longer stretch the way they used to.
Not sure it is all doom and gloom. The fed doesn’t count accelerated debt payments as “saving”, but I do. If I throw an extra $1k in a low yield bank account, it is “saving”. If instead I throw the extra $1k towards paying off my mortgage faster, the fed does not count that as “saving”.
Either way, I’ve increased my networth by $1k. I think the graph is just a representation of the low interest savings accounts today…money is better “saved” elsewhere.
According to the Feds the interest rates won’t go up until at least mid 2015. After all, the banks have to use our money to make back what they lost during the morgage crisis! Great system we have! Let the poor senior citizens who depend on the interest to eat suffer!
Whether saving and spending tendencies are environmental or not, there’s a certain culture outside of the home that can’t be controlled. Some children with painfully frugal parents will emulate those habits as adults. Others will grow up and do the exact opposite, refusing to save the dollar they need tomorrow. Believe me, I’ve met both. As someone mentioned in the previous article, it seems to depend on how the individual internalizes their financial and cultural situation, and whether they choose to emulate or reject those ideals.
Regardless of the saving rates, I would still suggest an emergency fund. Other than that, I do not see a recovery any time soon. I think our economy is in such a fragile state that any increase to rates could cause another recession. I know this may ruffle some feathers but I do not see a recovery in the next four years. Most of my investment is going into my 401k where I have been averaging almost 7% over 1 year, 9.3% over 3 years and 6.6% over the past 5 years. Not as good as they used to be, but still better than a savings account.
What always has scared me about these low savings rates is that, for every extreme saver like those who read this blog, there must be many people with zero or negative savings. My family saves about 25% of pre-tax income, which may be low for this site.
With the way our country is being managed right now, I cannot see savings rates increasing at all anytime soon. It makes me wonder why more people don’t opt for a money market or a safe blue chip investment. Those options almost guarantee that you beat the rate of return that you’d receive from a savings account.
I think it will rise, counter to the incentives. Millennials and Gen-Y are emerging in tough times and seen some articles about them already saving at higher rates and Boomers are entering into retirement and thrift opposed consumption seems to be the tone of those articles. Gen-X will probably remain fiercely independent and all over the map, thus not skewing the trend data much 😉 — It should be noted that 1990 saving rates were also against the incentives (5% passbook savings, 7% secured loan [’91], 8.32% mortgage [’95], all with low inflation rates).
I think it’s going to be a good few years before we see it come anywhere near 5% levels. I would love to see 10% levels again. Out of interest it would be awesome to overlay inflation rates on this
It would be interesting to look at the savings rate in Canada and see if Canada’s Tax Free Savings Accounts (TFSA) had any effects. TFSA seems like a great way to encourage people to save, and I wish the U.S. would start the same program.
My guess is the same as yours–US savings rates will stay below 5%, mostly. I don’t know why, but seems more and more people simply cannot forgo current consumption in favor of future consumption.
If my cash + credit is more than what something costs, then I can afford it, NOW, right? 🙂