OVER THE 50 YEARS through 1998, the annual U.S. savings rate averaged an impressive 10.3%, according to figures from the Commerce Department’s Bureau of Economic Analysis. But in the decade that followed, the savings rate collapsed, plunging to an average 4.5%. Since then, our financial behavior has improved somewhat, with the annual savings rate notching an average 8.2% over the past 13 calendar years. That average got a big boost from the 16.4% savings rate in 2020 and 12.3% in 2021, when the pandemic restricted spending while many families socked away the stimulus checks they received.
In seems that, as memories of the Great Depression of the 1930s have faded and life in the U.S. has grown more comfortable and stable, Americans have felt less urgency to save. Increasing income inequality may also lie behind America’s low savings rate, as well as our high household debt. As those lower down the income spectrum worry less about their financial future and more about keeping up with rising living standards, they have ended up spending more than is prudent.
In the late 1990s, some argued that America’s collapsing savings rate shouldn’t concern us, because it failed to take into account rising stock prices, which were more than compensating for our dismal savings habits. The same argument was made in the early 2000s about rising home values. Problem was, these exceptionally good stock and housing returns effectively borrowed from the future. Sure enough, the good times were followed by stretches of truly wretched performance—and those who hadn’t saved were left shaking their heads at the sorry state of their finances, which may explain the uptick in savings we’ve seen in recent years.
This might seem like a simple problem to solve: We just need to commit to saving more. But that’s easier said than done. While saving money sounds simple, it doesn’t come naturally to us. Like dieting and exercising regularly, it takes a lot of self-control to save money every month. Think about our hunter-gatherer ancestors. They didn’t worry about stashing part of their paycheck in a 401(k) plan to pay for a retirement that might be decades away. Rather, their focus was on surviving until tomorrow, and that meant consuming whenever they got the chance.
Today, we have constant chances to consume and, thanks to our ancient instincts, we’re often tempted to seize those opportunities. But if we’re to avoid a life of financial stress and eventually retire in comfort, we need to beat back our desires and save perhaps 12% to 15% of every paycheck for retirement, and even more if we have other goals.
Our Humble Opinion: For ordinary Americans, what’s the secret to getting rich? It’s no secret at all: You need to live beneath your means and save a healthy sum. Without that discipline, your chances of amassing significant wealth are slim. The good news: It doesn’t take much to become a great saver. Suppose you’re currently spending 95 cents out of every $1 you earn, while saving the other five cents. To increase your monthly savings rate by 100%, all you need to do is to trim your spending to 90 cents out of every $1 earned, a mere 5% decline.
Next: Today’s Spending