Personal Savings Fall to 74 Year Low

<div class='quotetop'>QUOTE(Beryl Octet @ Feb 1 2007, 12:45 PM) [snapback]383953[/snapback]</div>

Our househould saves 35% of our gross income. Better than average, not fantastic though.

 

37% for me. I didn't even realize until I just looked it up!

 

Well, I tend to look on the even darker side of this: my assets are their debts. The bank balances and such that I consider assets are in fact merely others' promise to continue to make their monthly payments on their debts. Seems like a slender reed to me. FDIC will pay me back if a bank fails, nobody's going pay me back if a bunch fail.

Also, you might ask who it is that is not saving money, and the Fed's best answer is: rich folks. That suprised the heck out of me. Realizing that the downward trend in savings has been going on for a while, and can be tracked back to the late 70s, and realizing that real hourly wages have largely stagnated over that period, and that household incomes have risen only through additional labor hours, I'd have though that this was just another sign of the middle and lower class getting squeezed. But nope, the Fed says that it's all completely rational behavior on the part of the well-to-do, whose stock gains and real estate gains mean that they need not save out of current income, and that savings by the middle class and poor have not trended downward.

Not sure I believe it but here's the link to a nice chart and summary of the research. Oh, actually, I don't want to start gettting like *some people* on this board and disbelive stuff because I don't like it. I believe the facts as presented by the Fed, I'm just not quite at ease with the implied behavior.

http://www.frbsf.org/education/activities/.../2002/0202.html

Key quote:

" ... these same cohorts (income groups) of households whose portfolios surged in value decreased their saving rates sharply over this period. In fact, we show that the well-documented decline in the economy-wide rate of personal saving over the 1990s can be attributed almost entirely to a sharp reduction in the saving rate of cohorts of families who experienced the largest capital gains."

So, it's not that we're financially stressed, it's just we're doing so well that we don't have to save out of current income. How nice for us.

Of course, the interesting thing here is that the source of the cap gains has shifted from stock to real estate without so much as a hiccup in the downward trend of the savings rate in recent years. (I should also note that I believe they are not talking about realized capital gains -- from houses actually sold or stocks actually liquidated -- I think they are talking about the value of families' existing portfolio of assets. If they'd actually taken the gains, it would have been part of current income and shown up in the statistics that way.) I wouldn't be so sure there was enough cap gain in 2006 to keep this hypothesis going, but I haven't seen anything more recent than this fed site.

The Fed spins it as a rational expectations or permanent income kind of thing -- essentially, that the wealthy have rationally chosen to dissave from current income because capital gains (not realized gains from sales, but increases in value of assets) provide, in effect, a second income.

But there's no empirical basis for that spin, really. I could as easily believe this is just financial pedal-to-the-metal behavior. In other words, if the well-to-do made a habit of spending every dollar they could lay their hands on, then you'd see the same empirical inverse relationship between capital gains and dissaving from current income. So, this could just be party-on behavior. If I had to bet, that's what I'd bet.

Now the interesting question is, what'll happen if there are net capital losses/declines in asset valuations. If this really is rational expectations about permanent income, then relatively little ought to happen, because if people were rationally allocating part of their capital gains to current consumption, then they'd also rationally understand that trees don't grow to the sky and that high rates of appreciation are typically not sustainable. But if this is just party-on behavior, then ... well, I guess they'll quit buying stuff for a while.

Guess I'm turning this into another dissertation. I'll stop. Lousy savings rate? Point the finger at rich folk, that's what the Fed says.

 

the sad thing is, you can save all you want, be good honest likable, humble, people, and the next guy goes out, gets him mansion, beamer, and when it all falls apart, pulls a chapt. 7, and is out there repeating the same thing 3 years later... there's no REAL incentive to save these days...

 

<div class='quotetop'>QUOTE(Mystery Squid @ Feb 1 2007, 11:29 AM) [snapback]384033[/snapback]</div>

Personal integrity.
Self reliance.

If those aren't good enough reasons, then compensating for moral bankruptcy is the name of the game.

I don't care what others have.
I am happy and content with my lifestyle.
I know many rich people and posers who aren't.

 

35% of gross income is like 50% of net income. That's an incredible amount of savings, literally setting aside $1 for every dollar spent.

I save maybe 20-30% of my gross, but lately, the money is piling up, I really don't know where to put it anymore, 401k and IRA's are maxed every year.

I'm thinking a mcmansion might not be a bad way to go, considering it may appreciate over time.

Paying down my mortgage seems like a dumb idea since I take a tax deduction for the interest, and rental property sounds nice, but it also sounds like a headache.

As for the beemer, everytime I see one, I just laugh, since you know they didn't pay cash for it, they lease it, and think that you in the Prius must not be "rich" like they are.

Funny how once you have enough money in the bank to buy just about any car on the market, the new car seems like a rip off.

I know a ton of people that will buy a $35,000 car on a monthly payment without blinking, but would consider accumulating $35,000 into a bank account as an impossible goal, even over 60 or 72 months.

Nate

 

<div class='quotetop'>QUOTE(Sufferin' Prius Envy @ Feb 1 2007, 03:08 PM) [snapback]384050[/snapback]</div>

I don't have a huge mansion but my house IS paid for. I drive a humble little Prius instead of a BMW but, again, it's paid for. I have a liquid cash reserve for real emergencies and no credit card debt. I may not be flashy but it's better than having a huge house and a mortgage, an expensive BMW and a car loan and having to pay thousands of dollars per year for the privilege. The average credit card debt just one year ago was $6000 and now it's $8000. The only thing that this country seems to be well known for is debt. Anyone out there have a BMW? Is it true that it helps get girls? :lol:

 

As far as getting girls, Jack, I bought my car thinking it was the opposite of a chick magnet, but didn't really care.

However, I have gotten several unexpectedly compliments. I think it's because of the unique factor (of course, three years ago this was more the case).

My buddy borrowed my car and drove his 17 year old daughter around in it. When they brought the car back, she got out of it and told me it was the coolest car she had ever seen, and called all her friends over to see it.

I honestly think men in BMW's worry more about how their car appears to other men.

Nate

 

I don't know how you guys are doing it. We make a healthy income and we are only putting max contributions in a 401K. We have savings from tax refunds at year end and "extra" payroll checks during 5 week months but that's it. We live check to check and throughout the year any extras that come up are paid for via our savings that have accumulated from the aforementioned. We live very modestly in a small ranch house without anything extravagant. We want to retire as soon as possible, so we don't spend money on things we don't "need". I give all of you credit. I guess on the up side, we do have equity established in our home and also in a 5 acre parcel that we purchased via an IRA vehicle. We also don't have fixed debt other than the mortgage and one car.

 

<div class='quotetop'>QUOTE(SSimon @ Feb 1 2007, 03:50 PM) [snapback]384080[/snapback]</div>

I'm not a republican either. Some luck, some stock options a certain asceticism and you too can do it. Things even out over the long haul, though. Five acres sounds great and I don't have that. I don't have a BMW either :lol:

<div class='quotetop'>QUOTE(naterprius @ Feb 1 2007, 03:49 PM) [snapback]384077[/snapback]</div>

I was just kidding about the BMW thing, although a neighbor has one and seems to do pretty well . Kids love my car, everyone who rides in it with me loves it too and always says 'you should sell these cars, you'd be great at it'. I'm pretty sure that my girlfriend didn't go out with me because of my car

 

No 5 acre parcel here, either. It sounds like you are doing okay.

There are always places you can cut, but some of them really hurt.

No matter how much money you are making, there is always somebody getting by on less.

The other day, I dropped by a goodwill store and picked up an art table, an art easel, and a bicycle that were all perfect for my two year old. These three items together would have easily cost about $150, even at Wal-mart. I paid under $20 for all three, and the money goes to a good cause. I even got a tax deduction for old clothes I donated while I was there. My two year old is thrilled with the stuff.

Have you tried freecycle? I requested and received a wagon for my kid, a Radio Flyer ATW. These cost about $150 new. I tightened up all the nuts and bolts, gave it a coat of new red paint, and cut a piece of "aisle runner" from home depot to fit inside the bottom. I spent about $25 and 90 minutes on it. I told my wife maybe I should have just purchased a new one, but she reminded me that the new one would have required a trip to the store to go buy it, then probably the same amount of time on assembly.

I recently discovered that my wife rarely uses her Sprint phone, even though I spend $40 a month for it. I discoverd that for $140 I could buy a $40 T-Mobile prepaid phone at Target and for $100 I could get 1000 minutes that wouldn't expire for a year. This was about half the minutes she uses! So, for $140, she got a year's worth of cell service. The year has come and gone, and now, she bought another 460 minutes for $50 for year two. So, I converted a $40 a month expense into a $50 a year expense.

Unless you actively fight it, your lifestyle will always expand to fit your income.

Nate

 

Our savings rate is close to 40% but is not counted as "savings." Much of our savings goes into real estate trust deed payments, 401(k), 403(B), and Roth IRA accounts. We have very little in traditional saving accounts. We live very well and healthy by living beneath our means. No thinking person puts money in a savings account.

It will be a different world as the "baby boom" generation cohort moves into retirement. Many live from paycheck to paycheck and are often "upside down" (owe more than they have) and have set nothing aside for a rainy day or retirement. Forget Social Security, those who have savings are penalized for being frugal.

 

<div class='quotetop'>QUOTE(naterprius @ Feb 1 2007, 02:36 PM) [snapback]384062[/snapback]</div>

You'll pay a lot more in interest on your mortgage than you'll ever get back in tax deductions (a percentage on a percentage). Interest on a 30-year loan can be something like 80% of the loan itself (100K loan becomes 180K in payments). You make an extra payment a year and you can knock years off the loan because of reduced interest payments (my mortgage company has a calculator where you can get the actual numbers). I'm amazed at the audacity of 3rd-party loan companies that try to set up automatic payments from your bank to the loan that do effectively the same thing as an extra payment a year, but they charge you something like $600 to set it up and $30/month for the life of the loan. You can do that for free, what are they thinking?

The simplest rule is to put your money to the place with the highest interest rate (debt or income). If you owe on credit cards, you put it there. If you have a car loan at 10%, that's the next thing to pay off, if you can get an account guaranteeing 8% return, put it there, otherwise put it on your mortgage, assuming that's somewhere around 6%, etc.

 

<div class='quotetop'>QUOTE(Sufferin' Prius Envy @ Feb 1 2007, 03:08 PM) [snapback]384050[/snapback]</div>

Agreed. And thank you for putting it so nicely.

Also, if I may add, I don't define my worth as a person by how many things I have, or allow others who do to imply that something is wrong with the way I live.

 

<div class='quotetop'>QUOTE(Mystery Squid @ Feb 1 2007, 01:29 PM) [snapback]384033[/snapback]</div>

You're not going to get a mansion after a bankruptcy, at least not with single-digit mortgage rate. Your credit score gets socked like that, and you'll have problems buying anything on credit at an advantageous rate.

There's a reason for that, but there's also the negative effect - people who need it can't get the low rates. When I was laid off, I tried to refinance my house, since the rates had dropped. Couldn't do it, until I had a job again. Then they were willing to let me lower my monthly payments! The truly poor end up going to loan sharks at triple-digit APRs, because they don't know better or don't have the options. Or get an advance on their paycheck or tax refund from H&R block, which sounds professional but isn't much different than going to a loan shark.

 

<div class='quotetop'>QUOTE(nerfer @ Feb 1 2007, 04:59 PM) [snapback]384113[/snapback]</div>

You lose a deduction in mortgage interest but gain a lot more in money that stays in your pocket. Did you ever really look at what a 30 year mortgage ends up costing you over that time? Ouch!