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Why save more?

By Marcie Geffner ·
Wednesday, September 29, 2010
Posted: 10 am ET

5.9 percent -- that was the U.S. personal savings rate in July 2010, according to the Bureau of Economic Analysis, or BEA, one of the federal agencies that keeps track of such statistics.

That 5.9 percent figure was slightly lower than the 6.2 percent rate the BEA calculated for June 2010 and substantially lower than the 7 percent-plus rates posts in mid-2009, but still decidedly up compared with the even lower levels -- less than 2 percent, at times -- recorded five years ago.

Of course, not all of those savings are held by banks, though plenty of people still keep their money in savings and checking accounts, certificates of deposit and other financial products that banks offer. And that's despite today's meager returns on most of those deposits.

It's easy to understand why people have stepped up their savings. High unemployment creates job insecurity. Losses on equities and real estate erode the wealth effect that people experience when such assets produce strong returns. The general sense of economic malaise prompts people to hunker down and save more for the proverbial rainy day.

Of course, some people do have the opposite reaction, turning a bad-patch economy into an excuse for a spending spree. But that's another story.

The personal savings rate also affects a myriad of other issues, such as consumer spending, income tax policy, the percentage of U.S. debt held by foreigners and retirement trends, just to name a few. The interrelations among consumer spending, personal savings and the U.S. economy alone could be the subject of many, many blog posts, not to mention articles, policy papers and dissertations.

But the big question about consumer savings today, however, is, of course, interest rates. Why are people saving more when the returns on savings in safe investments are so paltry? Some analysts say the U.S. rate of savings is still too low, but what incentives exist for people to save more?

Given the likelihood that interest rates will remain unattractive for savers "for an extended period," to use the Federal Reserve's phrase, do you plan to save more through the end of this year? If so, why?

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Marcie Geffner
October 05, 2010 at 6:08 pm

Those are some excellent questions to consider with respect to savings: How long can someone hold out with no income, on a reduced income, with or without unemployment benefits and with or without COBRA? For many people today, how much to dip into savings and for how long and how to make their savings last are very real issues.

Debra James
October 04, 2010 at 5:14 pm


Thanks for the explanation. I think I understand the BEA's meaning of savings rate. I can also see how there would be controversies, because how expeditures are calculated for a whole population would have a lot of variables.

Personally, I have enough savings that could pay for 10 months of my basic living costs if I had no other form of income. However, the ability of my money to last this long does not take into account the costs of COBRA, because I do not know how much that would cost; it won't be cheap, that I know. My savings would last longer than 10 months if I were to receive unemployment benefits. If an urgent event or true emergency occurred I would probably have to pay for it with credit in order to preserve my savings, because in today's market you never know how longer you will be unemployed.

Marcie Geffner
September 30, 2010 at 5:38 pm

An excellent question, and here's the answer:
The BEA defines the personal savings rate as “the difference between current-dollar disposable personal income and personal outlays,” or the percentage of disposable personal income that’s not spent on taxes or other expenditures.
There are some controversies over how the rate is calculated, and the numbers are sometimes revised, but those revisions “have consistently retained the long-term downward trend in the personal saving rate from the early 1980s to the early 2000s,” according to the BEA website.
The Federal Reserve tracks a personal saving rate based on the difference between net acquisitions of assets and net increases in liabilities of households and individuals. Again, according to the BEA website, the Fed’s statistic also “shows the same downward trend in personal saving relative to disposable personal income” as the BEA’s numbers.

Marcie Geffner
September 30, 2010 at 5:30 pm

Absolutely. Building up an emergency fund is an excellent reason to save more, despite the low interest rates on savings accounts.

September 29, 2010 at 4:25 pm

Yes, to bring my emergency fund to 6 months and more.

Debra James
September 29, 2010 at 3:41 pm

Would you please clarify for me what the first percentage that you are stating represents? Does it mean that 5.9% of people polled have savings? Or, does it that mean that 5.9% of some undefined population have savings? Or, does it mean that 5.9% of all U.S. money is in savings? Or, does it mean that people save 5.9% of their earnings (or, take-home wages)?

Your response will probably better understand the context of the article.