Back in December 2017, the US personal savings rate – disposable income less personal outlays – fell to 2.4% as of December 2017. This was even below the savings rate of 2.5% in November 2007, and the lowest savings rate since September 2005.
In other words, it will take roughly 45 years for the typical American to save just one year's worth of income. This is a disaster. Americans seem to be overspending during this economic recovery and not saving for the inevitable slowdown.
Here are some other facts about the average American's financials that we should be worried about:
- Only 48% of adults have enough savings to cover three months of expenses if they lost their income.
- An additional 22% could get through the three-month period by using a broader set of resources, including borrowing from friends and selling assets.
- But 30% would not be able to manage a three-month financial disruption.
- 44% of adults don’t have enough savings to cover a $400 emergency and would have to borrow or sell something to make ends meet.
- Folks who had experienced hardship were more likely to resort to “an alternative financial service” such as a tax refund anticipation loan, pawn shop loan, payday loan, auto title loan, or paycheck advance, which are all very expensive.
Similarly, Bankrate found that only 39% of Americans said they’d have enough savings to be able to cover a $1,000 emergency expense. They rest would have to borrow, sell, cut back on spending, or not deal with the emergency expense.
All these surveys say the same thing: about half of Americans have little or no savings though many have access to some form of credit, including credit cards, pawn shops, payday lenders, or relatives.
Meanwhile, a record high 30% of American households have zero or negative wealth outside their primary residence, despite the fact that the stock market has reached new record highs in 2018.
It's clear from the data that the typical American is screwed when it comes to retirement savings and will likely have to work for much longer or live a very spartan retirement life.
If you want to have financial security it's important to save and invest as much as possible for as long as possible. If the amount of money you're saving each month doesn't hurt, you are not saving enough.
US Personal Savings Rate Is Improving
There is good news for 2019. The US personal savings rate actually is now about 7.5%, as both real estate and the stock market have rebounded. US citizens are better preparing for a downturn.
Another big reason for a ramp up in savings is due to much higher money market savings rates.
After the Fed raised rates multiple times since end of 2015, you can now get 1.25% on a money market account from the likes of CIT Bank. This rate is huge compared to the 0.1% average rate you could get in 2015.
Once the coronavirus pandemic hit and economies locked down, the U.S. personal savings rate skyrocketed to 33% in April 2020. 33% breaks all previous records. We know the savings rate is temporary, and will likely fall below 10% by 2021.
Everybody should be taking advantage of higher savings rates and saving more.
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About the Author: Sam began investing his own money ever since he opened an online brokerage account in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at two of the leading financial service firms in the world. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
FinancialSamurai.com was started in 2009 and is one of the most trusted personal finance sites today with over 1.5 million organic pageviews a month. Financial Samurai has been featured in top publications such as the LA Times, The Chicago Tribune, Bloomberg and The Wall Street Journal.
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