Savings Rate Increasing, But I Don’t Think It’s High Enough

According to Reuters, the U.S. savings rate has increased to 3.8%.  That’s nice,* but I’d like to see it higher.  Here’s why.

It’s a well-known trope that financial planners love it when people save money.  Usually, when you hear standard financial planning advice, they’re telling you to save at last ten percent of your income for your old age.  Sometimes it’s even higher, at fifteen percent or more.  Remember, that’s for old age – not for large purchases or emergency funds.  When you add savings targets outside of retirement, your savings rate can get pretty big.

That’s why I think there’s still room for improvement in the savings rate, from a financial planner’s point of view.  You see, 3.8% percent is nowhere near what’s necessary to fund a retirement, unless you start savings at a ridiculously young age.  (What, you weren’t earning $40,000 per year at age three?)  It’s really even enough to reliably fund an emergency fund over a reasonable period or short-term savings.

Elizabeth Warren and Amelia Warren Tyagi wrote a book called All Your Worth with an eye to savings rates.  They used ratios of 50/30/20 for budgeting.  They suggested that 50% or your after-tax spending got to necessities, 30% to luxuries and non-essentials, and 20% to savings.  Notice, the recommended 20% is a great deal larger than 3.8%.

So, America, kudos on moving out of negative territory, but we’re still pretty short of where we should be.

* And to all you who say that’s bad, because there’s not enough spending to make the economy grow, I respond: “The economy is made to serve people, not people to serve the economy.  Also, don’t conflate overall economic growth with improvement in people’s lives overall.  They’re not the same.

This entry was posted in Current Events, Financial Planning and tagged , , , , . Bookmark the permalink.