How much does your household save each month? Are you saving enough to retire comfortably? Do you have an emergency fund in place and discipline yourself to contribute to this fund on a regular basis? Do you have a savings account for your children’s education? Can you honestly say that you feel comfortable and confident about your financial future no matter what happens? Does your household save at a rate equal to the national average?
Averages have Limitations
American savings rates have fluctuated widely and while the average household savings rate is presently in the 5% to 8% range overall, there is great deception in these numbers. The reason is because averages are often very deceptive and this is particularly true when talking about income and investment/savings. The general rule with averages is that, the more lopsided or extreme the set of data, the less reliable averages are and this is illustrated well with the savings graphic above.
Who Really Saves the Most and Least?
We at Money Saving Parent strive to save more than 10 percent of our income each month and we have met this financial goal, for the most part. I ran across the above graph- The Distribution of U.S. Wealth, Capital from Emmanuel Saez and Gabriel Zucman- one day when I was reading about personal finance and was surprised by what it illustrates. It shows that savings rates, like incomes, vary so widely from one household to the next that averages are meaningless.
The graph shows the savings rates, by decade, for the average household with lines representing the top 1 percent (about $380,000 in 2010 dollars) of wage earners; the Top 10 percent to 1 percent (between $114,000 and $380,000 in 2010 dollars) of wage earners; and the remaining 90 percent (below $114,000 in 2010 dollars) of wage earners. The last 12 years, illustrated by the final two plots on the graph for each of the three lines, paint a picture of great disparity. The wealthiest 1 percent of wage earners save a large percentage of their income, as expected, with savings rate presently approaching 40 percent. Those in the top 10% to 1 percent are saving a respectable 11 percent of earnings. But everyone else- the bottom 90 percent- is saving barely over 1 percent. The figures during the 2000 to 2009 period were even worse, with the bottom 90 percent experiencing negative savings; meaning, they were not only not saving money, they were dipping into savings and/or watching investment values plummet.
Improving Your Savings Rate
Depending on household budget constraints, employment status, and other factors, achieving a stable rate of savings can be challenging. I recommend that everyone try to save at least 10 percent. The savings can include 401k or other company sponsored retirement plans, cash savings, child educational funds, IRA, cash savings, etc. It is best to divide up savings and investment into as many buckets as possible but, at the very least, everyone should have a cash savings account for emergencies and everyone who qualifies should sign up for their company 401k or similar plan.
Strive to save 10 percent. If this is too much, examine your personal financial situation and determine if there are things you can cut back. Perhaps you have a habit of dining out multiple times per week? Maybe you belong to a fitness club and pay a monthly fee yet never visit? How about a subscription to a newspaper that ends up in the trash and is rarely read? Try to cut unnecessary expenses and boost your household savings to or above the 10 percent mark. Then, each year, strive to add a little more to the percentage. When you get a raise, increase your 401k contribution or add to your cash savings account. Do what you can to lift your household savings rate above the average level for your income bracket.
Don’t be Average
As the savings graph clearly shows, rates of savings vary extremely by income level and the fact that the U.S. average savings rate falls between 5 percent and 8 percent is meaningless. One has to look at the breakdown by income class to gain a better understanding of savings rates and who among us is saving the most and least.
Averages really don’t mean much. We often tell are kids that we expect them to be better than average and as parents, we should expect the same of ourselves. Don’t settle for average when it comes to your household’s savings and investment rate. Cut back where you can, add a few extra percentage points to your 401k contribution, and build your household’s savings rate until it exceeds the average for your income bracket. A little sacrifice today can make a great difference tomorrow so adjust your lifestyle if necessary and start saving more today.
Copyright 2014, Bryan Carey