This was the year of the return to financial sobriety — if you judge such things by the nation’s personal savings rate.
Ron Lieber writes the Your Money column, which appears in The Times on Saturdays.
How much money did you save in 2009, and why?
That rate — which was 4.4 percent in October, according to the Commerce Department’s Bureau of Economic Analysis — subtracts what we collectively spend from what we make and then expresses the result in percentage terms. In 2009, it has ranged from a low of 3.4 percent in February to a high of 6.4 percent in May, which was the highest figure since 1993.
In the decade and a half since that last high, gains in the stock market and housing prices gave people the confidence to spend more, and looser credit standards made it easy. That caused the savings rate to fall. But all of that is over for now — or perhaps forever.
Whether that’s a good thing depends on your perspective. In the short term, less spending slows the progress of economic recovery. But for individuals, putting more money aside and saving it for years or decades will lead to less debt later and more comfortable retirements. It’s hard to make a case against that long-term approach.
So if you want to be an above-average saver, it’s worth a look at the trends behind the changing savings rate for clues as to why it’s gone up, who’s responsible and how those people manage to set more aside. While the government doesn’t offer much demographic data, other surveys and figures from retirement plan administrators offer hints.
But first, a bit about that savings rate — and the money that may feel like savings to you that doesn’t actually count when the government computes it.
The personal savings rate calculation begins with personal income and then subtracts taxes to determine disposable personal income. Both employee and employer contributions to 401(k)’s count toward the savings result, though data on employer matches can be a bit out of date.
Any capital gains, whether sitting in a brokerage account or realized through an actual sale of stock or mutual funds, don’t count, though. Also, while you may consider your mortgage payment a form of forced savings, the bit of equity you’re building up (when your mortgage isn’t underwater, at least) isn’t counted in the personal savings rate either.
So the savings rate is a short-term snapshot, and while month-to-month changes may not mean much, the trend over the last year is clear. But why has it gone up so quickly?
One contributing factor is probably force. Without access to high limits on credit cards or home equity loans, you’ll certainly have a harder time spending more than you take in. People can spend what they make, but not much more, and facing the lack of loans to help them out, they may simply choose to spend less.
But perhaps the biggest consideration is fear. When unemployment hits double digits, you’re more likely to put money aside in case your income disappears. Every three years, the Federal Reserve publishes its Survey of Consumer Finances, and the 2007 study asked respondents the most important reason that pushed them to save. Retirement was the most popular answer, with 34 percent of people naming it, but general liquidity was a close second at 32 percent. In 2010, it may well overtake retirement.
So who saved even more than average in 2009? The fact that the savings rate peaked in the spring, when federal stimulus payments began landing, suggests that the Social Security recipients and middle- and lower-income Americans who benefited may have banked much of the money.
Young people also got in on the act. In employee retirement accounts at Bank of America Merrill Lynch, where workers elected to start or stop saving through November of this year, 74 percent of those ages 21 to 35 began saving, while 26 percent ceased. That was the highest “start” percentage among any age group.
Those with higher incomes have also signaled their intent to save more. A Gallup poll from July reported that 34 percent of respondents with incomes of $75,000 and above planned to save more and described this as their “new normal.” Just 5 percent said they planned to save less. Still, this is hardly proof that the personal savings rate will never again fall below, say, 3 percent. It’s always tempting to say that habits will change forever during a particularly rough economic moment, but plenty of people will spend their savings from 2009 a year or two from now when the economy seems better.
The federal government is encouraging more savings by, for example, allowing people to turn their federal tax refunds into a savings bond. But then there are also initiatives under way or in the works to get people to spend money on cars, appliances or weatherproofing.
There’s one encouraging development, however, that may indeed provide a permanent boost to savings: the efforts by employers and retirement plan providers to capture the raw power of inertia.
Vanguard notes that from 2006 to 2008, an average of 70 percent of its retirement account holders made no changes to their savings rate in any given year. One in five increased the percentage of money they set aside each year, but Vanguard figures that much of that was because many employers automatically increase workers’ savings rates each year by raising their 401(k) contribution. Employees can opt out if they want, but most don’t. Many employers now also have automatic enrollment in 401(k) and similar plans, which probably explains the lopsided percentage of Bank of America Merrill Lynch customers who started rather than stopped saving this year.
Given that most people will stay in the retirement savings plans and submit to the automatic increase in their savings each year, the national savings rate could creep up permanently as a result. Until it does, if you want to be above average, there are plenty of ways to put inertia to work for yourself.
Outside of your retirement account, you can set up an online savings account or 529 college savings plan to pull money automatically from your checking account each month. You can also use a flexible spending account or dependent care account as a form of forced savings; the only trick is to put the reimbursement money someplace where it won’t be easy to spend.
If you don’t carry a balance on your rewards credit cards, the cards can help you out here, too. Fidelity and Charles Schwab offer cards that give you cash back and deposit it into your brokerage account, individual retirement account or 529 plan. And programs like Upromise also refund bits of your spending into a college savings plan.
Many of these tactics may yield only a two- or three-digit amount of money each year. That may not seem like much, but taken together, these strategies can add up to a percentage or two more of your income than you might otherwise have saved. And if that puts your own savings rate at 5 percent instead of 3, you’ll be beating the average at last.
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