US Savings Rate Stabilizing = More Spending

by Sandy L on December 23, 2010

Yesterday I decided that my leftover taco fixings will be born again as a nice hearty chili. Oh was it good.  The only bad part was when I thoughtlessly rubbed my eye with my jalapeno covered left hand and it started burning my eye socket out. I jumped out of my chair wondering what the heck to do as I was convinced I was doing permanent damage to my cornea.  I finally soaked a clean paper towel with water and  scrubbed my eye hoping for relief.  It helped a little but my eye was still stinking and I couldn’t open it fully.  What did I do next? Well,  I thought rubbing it might sooth it a little and instinctively rubbed it with the same tainted hand. I thought to myself OUCH and WOW ARE YOU STUPID  for not learning and I had to go through the agony all over again.

Then when I drove my kids to school, an interesting article came on NPR.  The commentator stated that although unemployment rates are still at the place where they were a year ago, people are spending a lot more on Christmas this year.  The reporter’s opinion was  that people are just going through frugal burnout and are starting to open up the purse strings again.  I have at least one other theory that reminded me of a post I wrote a few months back called Paying Off Debt Helps the Economy.

Perhaps it’s not that consumers are just going back to their crazy spendy ways.   The eternal optimist in me thinks that maybe consumers have spent the last year or two getting things in order, paying down debt and building emergency funds.  Maybe they are just now in a position to spend freely again.  Also, if you have the cash in the bank to buy the latest gadget, I imagine it must more of a guiltless transaction.  If you are meeting your savings goals and have the cash laying around to spend on your dearest family members, why not finally reward yourself for a job well done?

Personal Savings Rate History

In case you’re interested, Free by 50 Plotted the Personal Savings Rates from the 50’s to 2010 and has links to where the federal government has the raw data.  As of October the Savings Rate is hovering at about 5.7%.  It hovered in the low 2%’s right before the crash in late 2007 and was as high as 14% in the 70’s.

I wanted to look at the data in a different way and plot it year by year during this recession. I honestly I didn’t know what the data would tell me until I plotted it. Here’s my interpretation of the chart.  In 2007,  people were happily trucking along saving next to nothing because jobs were booming, headhunters were calling and the future looked bright.  Then in 2008, all hell broke loose. People felt out of control. They were all over the place trying to figure out the right amount to save during this downturn. They bobbed up and down for almost a year and a half and just in case, they also saved most of their tax returns too. By the end of 2009, people were starting to figure out that 5-6% felt like the right amount of buffer to save for their families.  By 2010, consumers started to feel comfortable again. It even looks like people started spending their tax returns this year.  They now feel they can go back to spending because they’ve achieved a new level of financial homeostasis.

So now that you’ve seen the data, which scenario do you think it is? Have people finally found the right balance between spending and saving?  Or are they like me and don’t learn from their mistakes?  Are they about to burn their financial eyeballs out twice in a row and rack up that credit card again?  I guess I’ll have my answer at the end of first quarter when the savings rates are plotted by the fed.

Thoughts to what is happening here? I would love to hear your interpretation of the data.

{ 10 comments… read them below or add one }

The Biz of Life December 23, 2010 at 7:37 AM

“Frugality fatigue” is the new buzzword, and I believe there is a little bit of that going on. However, the artificially low interest rates engineered by the Fed to help the economy recover actually provide disincentives to save and incentivize consumption. Culturally, the marketers have been working on consumer psyche for years to turn them into consumption machines as well as all these implied promises that the government will take care of those who won’t take care of themselves— all of which result in less savings. I actually find it encouraging that in this low interest rate people are saving more in 2007. Maybe it is motivated by fear, but it is the right thing to do, and I hope interest will move higher so the savers are rewarded.


Sandy L December 24, 2010 at 5:10 AM

You are absolutely right. When CD rates of return were in the double digits, so were people’s personal savings rates. I don’t think going back to double digit rates would be prudent, but I would love to get at least 5% for my cash.


retirebyforty December 23, 2010 at 8:41 AM

Hey, I like your graph, it shows the trend very nicely. For 2010, everything smoothed out and there are no big spike or dip. I think this probably mean people finally figured it out after a few years of practice and know to keep a steady saving rate. If the economy stay steady crappy like this, I think the graph will stay the same. However, if the economy improve a lot, the saving rate will definitely drops. For this Christmas, I think consumers are not spending down all their saving so I don’t expect a huge drop to 2%.


Sandy L December 24, 2010 at 5:12 AM

RB40-I’m actually surprised that that savings rate is as high as it is giving the super low interest rates. I will have to revisit this topic and replot this graph later in the year. Now I’ve got myself curious and we’ll see if your prediction holds true.


StackingCash December 23, 2010 at 1:52 PM

I for one am tired of saving. Especially in this low interest rate environment. I notice quite a few people splurging these days, which says a lot because I live in Las Vegas. Even in a recession, people need fun more than ever, that’s why Las Vegas has always been recession proof. The main problem now was that the casinos took on too much unsustainable debt. Otherwise we wouldn’t be hurting so much right now.


Sandy L December 24, 2010 at 5:16 AM

Stacking Cash – for me as well, if you take out the kitchen remodel that I was in the middle of during the last crash, I’ve definitely spent more in 2010 on “stuff” vs 2009. I guess I was like the rest of the population with my behavior as well. I was dumping all my extra cash into remodeling my dumpy house and then when the recession hit, I put on the brakes for a while when I realized how fragile my employment was and how screwed we’d be if we lost our jobs at the same time. Now that I have a bit more buffer and my retirement is built back up a bit, I’m back at it again with a dumpster in my mom’s yard.


Kellen December 25, 2010 at 12:02 AM

I love your graphs – that’s a really neat way to look at the situation.

I think we’re still pretty spendy-happy people in general, but it’s hard to tell, because I only started working full-time this year – I think I’d have a different perspective if I had a longer time to see how people’s spending habits changed. More people seem to commend me for packing my lunch these days. When I interned in January/February 2008, people at work were still looking at me funny for bringing my own food. Not an overwhelming example, but maybe the world is a little more “frugal friendly” even if that frugalness is “fatiguing” us.


Sandy L December 25, 2010 at 6:36 AM

Kellen – thanks for commenting. Being Frugal is definitely chic’er than it has been in the past. When someone compliments me on something I got at a yardsale, I always proudly tell them. I used to get weirder looks, but not people are impressed and want to know my tricks.


Financial Samurai December 26, 2010 at 8:03 AM

I think people are sick of saving AND there is much MUCH more wealth out there than people think. Unemployment may be high, but there are many folks who are doing quite well in unemployment.

As the economy continues to recover, spending continues to increase and savings decreases. Good times!


Invest It Wisely January 3, 2011 at 11:21 PM

This savings rate still seems really low if it includes investment as well. If it’s just money in the bank I’m probably lower than that chart, but I’m looking to hopefully hit 50% in net savings & investments this year! May as well aim high while there aren’t too many obligations aside from the condo!


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