Last night, I read Jason Zweig’s WSJ column Using the Lottery Effect to Make People Save. He highlights how people save more money when they have a chance (not a certainty) of receiving a cash prize. Despite the fact that their odds of winning were low, savers squirreled money away more aggressively due to the “lottery effect.”
But, to me, that wasn’t nearly the most interesting point of the article.
Mr. Zweig references a study by TrimTabs Investment Research, which rather passionately disputes the U.S. Bureau of Economic Analysis claim that the savings rate has exploded to an annual 6.9% rate. Much has been made of the growing savings rate since the market correction began. As many of us now know, the national savings rate was actually below zero by some measures as recently as 2005.
You: Below zero? How is that even possible?
Easy, spend more than you make.
You: But this is a national savings rate. So, that means -
– that, as a country of individual households, we were spending more than we making. Add to that our government’s debt and it gets kind of ugly.
You: Kind of?
Very ugly.
You can read the study to get a quick sense for why TrimTabs feels the savings rate is so much lower. (For one thing, much of the difference between income and spending reported during the period comes from the $250 checks sent to senior citizens in the form of economic stimulus.)
I have some issues with both TrimTabs’ and BEA’s approach. The truth is likely somewhere in between. Either way, the savings rate is probably not as high as has been widely reported, although the direction (i.e., that it has been growing) is likely accurate.
But even if the BEA is accurate, it’s not time for those of us advocating greater saving to jump for joy. After all, as Mr. Zweig notes:
In 2007, the latest year for which final numbers are available, Americans spent $92.3 billion on legalized gambling, according to Christiansen Capital Advisors; that same year, says the U.S. Bureau of Economic Analysis, Americans saved only $57.4 billion.
Bottom line: All savings, like all real estate, is local. What are you doing? What is your personal savings rate? Are you saving enough for you, for your dreams, and for your retirement? Use your individual objectives as a reasonable benchmark, not the ever-changing and still way too small national average as your guide. Don’t compare your savings rate with the Jones’s anymore than you (should) compare your spending.
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I can see how innovative savings accounts like the “lottery” account in the article would encourage first time savers. I don’t have any problem saving over 25% of my gross pay, but I am a lifelong saver. 15% to retirement and longterm savings, some to grown my EFund (6 months take home pay and growing), some for midterm goals (house upgrades, paying cash for my next vehicle purchase, vacations). Plus I escrow my taxes, insurance and don’t count them into the savings %.
My advice to new savers is to make a list of intermediate goals. Start off with the minimum of getting the 401K match, then having a paychecks worth of Efund and then get consumer debt free. Break down your savings goals into smaller bites. $5000 a year to the RothIRA too much to face? Start with $100 a month – that’s 1/4. Then the next goal might be 1/2, ect.
@threadbndr: Good stuff. You demonstrate the advantage of getting in good financial habits early: makes everything else easier afterwards. And I totally hear you: If you can’t save what you really want to, don’t opt out. Do something, even a quarter of your goal will matter and will make it easier for you to, one day, achieve your goals. Thanks for the comment.