Another of those disturbing reports about Americans not saving money came out on Fortune last week. The U.S. Economy May Be Booming, But Americans Aren’t Saving gave the usual litany of dismal saving statistics: 23% of Americans have no savings whatsoever; another 22% have less than three month’s worth of living expenses; and another 18% have enough to cover 3 to 5 months. Only 29% of Americans have emergency savings to cover at least six month’s expenses. That’s down from 31% in 2017. It’s all practically become cliché. But none of the grim statistics answers why Americans don’t save money. After nine years of economic growth, booming stock and real estate markets, and a 3.8% unemployment rate, the trend should be going in the other direction.
It’s not, so let’s contemplate some of the reasons why this may be the case.
1. Economic Factors
I’m in the camp of people who believe the economy isn’t nearly as good as the government and the financial media are telling us. Sure, the stock market has been in a nine-year bull market, and house prices have generally returned to their pre-Financial Meltdown levels, or even higher. But those are more the result of loose monetary policy and artificially low interest rates than organic economic growth.
While acknowledging that some people – mostly the top 5% or 10% of households by wealth and income – are doing better than ever, most of the rest of the population is on life support.
I mean that seriously too. A 2011 report from the US Census Bureau revealed that 49% of America’s population is on some form of government assistance. More recent statistics indicate it’s crept up to 51%.
Other economic factors include:
- A job market that’s weaker than we’re being told.
- A high and rising basic cost-of-living, especially housing.
- Healthcare costs that are out of control.
- Systemic underreporting of inflation.
All these factors are combining to suck the lifeblood out of households, particularly those earning under $100,000 per year – which is the vast majority. (In 2016, the median household income in the US was just $57,617, which means half of households earned less.)
Those are the economic reasons why Americans don’t save money. Let’s move on to some causes that aren’t so obvious.
2. Zero Down on Major Purchases
If you can make major purchases without needing to come up with a down payment there’s a lot less reason to save money. And that’s just about where we’re at.
For example, it’s possible to purchase a car with no money down. In fact, auto lenders will often lend up to 120% of the value of the car. When they do, the additional loan amount is used to absorb the unpaid balance of the loan on a previously owned car.
It works like this. You want to purchase a new car for $20,000. Your current car is worth $8,000, but there’s a $12,000 loan on it. The lender will provide you with a $24,000 loan on the new car – $20,000 to buy the new car, and $4,000 to pay off your old loan. Not only will you not need a down payment to buy the new car, but you’ll be upside down on the new loan.
It sounds like the fantasy deal, but it’s actually quite common.
Housing is almost as bad. Before the Financial Meltdown, it was common practice to provide 100% loans for home buyers. It was also one of the causes of the economic crisis that followed. Yet zero down loans are still quite common. VA mortgages provide 100% financing to eligible veterans.
FHA mortgages require a 3.5% down payment, however the down payment can be a gift from a family member, or a loan from a local government. Translation: home buyers can and do get 0% down loans with FHA mortgages.
And what about vacations and other activities? You can do those with no money down too. Just pay for your vacation using your credit card, and you have no need for upfront money.
Zero down payment purchases make saving money “obsolete”.
3. Artificially Low Interest Rates
Low interest rates cut into savings in two ways:
- By lowering the cost of borrowing, they encourage consumption.
- By paying rates that are lower than inflation, they discourage saving money.
We’ve had artificially low interest rates ever since the last recession in 2009. That year, interest rates went down to near zero. Theoretically, it was done to stimulate the economy. But here we are, nine years later, and supposedly in the middle of a strong economy, and interest rates have risen only slightly.
All the smoke and media chatter about the Fed raising interest rates means little. Rates may be a little bit higher than they were nine years ago, but they remain at historic lows. They’re even lower than they were in the Great Depression, which has to leave a reasonable person wondering what’s really going on with the economy.
Until interest rates return to their historic normal levels, they’ll continue to provide a disincentive to save money.
4. The ATM Effect
Low interest rates are also contributing to the twin bubbles – stocks and housing. Low rates cause house prices to rise, by creating artificial demand. It enables the use of cheap mortgage money that fuels an inflationary housing spiral. With stocks, low interest rates lower demand for interest-bearing investments. People put money into stocks, seeking higher returns. The low interest rates of the past nine years are the primary reason for the nine-year bull market.
But while rising house and stock prices may be making some people wealthier, they’re also fueling the ATM effect. That’s where people use money drawn from bubble inflated assets to pay for purchases and even living expenses.
Once again, this is exactly what happened in the years leading up to the Financial Meltdown. When asset prices rise, people are very likely to use them as a capital source, rather than saving money.
With housing, the ATM is in the form of cash-out refinances, second mortgages, and home equity lines of credit. With stocks, it’s borrowing on margin against taxable accounts, or taking loans against retirement plans.
The ATM effect is another disincentive to save money. After all, if you can simply tap your house, your stock portfolio or your retirement account when you need money, what’s the need for having savings?
Some financial advisors are even recommending against having emergency savings. Instead, they advocate being “100%” invested, to eliminate cash drag. It might make sense from an investment standpoint, but it virtually forces you to tap your assets when you need money.
5. A Business Culture that Encourages Debt
You’ve probably noticed that nearly every car commercial on TV comes complete with a monthly payment. Years ago, a car salesman told me “we’re not selling cars, we’re selling monthly payments”. That’s because for most people, you don’t get a car without a monthly payment.
That’s just one example of how debt is encouraged in our economic culture. Few people make purchases with cash anymore. In fact, in a very real sense, credit has replaced currency as the primary medium of exchange.
That arrangement may be very good for sales, but not for household budgets. Debt payments reduce your budget, and leave less money for everything else – including saving money.
To put it another way, debt functions as a treadmill. Once you get on it, and your income is largely consumed servicing your debt, there’s no money left over to save. That forces you to continue borrowing money anytime there’s a need for cash.
That describes the situation in tens of millions of households. Credit has effectively replaced savings in many household budgets.
6. The Marketing Machine
We’re so inundated with commercial messages that we think of them as being as natural as air and water. In fact, the average American is exposed to as many as 4,000 ads every day. They come from TV, radio, the Internet, smart phones, billboards, email and snail mail, and the distribution of flyers.
Even if we consciously try to block out the ads, they still have a subliminal effect. If nothing else, they convince other people around us to consume what they otherwise wouldn’t. Since we’re all influenced by the people around us, to one degree or another, we’re impacted by ads even if we personally ignore them.
It’s not so much the products being pitched in the ads, but the lifestyle. Most ads sell us on the benefits that a product or service will provide. But that’s usually portrayed in a way that will improve our lifestyles. Marketing has gotten very sophisticated, especially in an age of computer graphics. A slick ad – like a really good movie – can turn any fantasy into a reality, at least in our minds. And that’s the purpose. Sell the sizzle, and the sizzle will sell the steak, is what an ad executive told me many years ago.
The job of marketing is to promote consumption, and consumption is the direct opposite of saving. We’re being bombarded with messages to consume, but very few to save. And when we do, it’s usually about retiring to the tropics.
That’s a topic for another article.
7. The Death of Delayed Gratification
I’m not going to spend much time on this. I think most of us realize how much this has become part of America’s cultural psyche. We’re a culture that lives very much in the “now”. There’s very little comprehension of the past or its relevancy, and nothing but optimism about the future.
Optimism is good on many fronts, but it can be counterproductive when it comes to finances. It can cause you to overestimate future income and wealth, and underestimate expenses or the impact of debt. All of which is hardly the motivation needed to save money.
The Best Way to Deal with Why Americans Don’t Save – Don’t Join the Herd
The question of why Americans don’t save money is often overwhelmed by the hyper-focus on the wealthy. It’s hard to pick up a newspaper or read an Internet page that isn’t reporting about the glamorous lives of the Royal Family, the Hollywood/celebrity crowd, or the nation’s billionaires. A Martian watching American TV might assume everyone in the country is wealthy.
Meanwhile, much is made of retirement savings as a theoretical antidote to the lack of other types of savings. Reality however is pointing in a very different direction.
The average level of savings for people between the ages of 55 and 64 – the last years leading up to retirement – is a dismal $135,000. That’s hardly more than a large emergency fund for a retiree. Meanwhile, a full 42% of the population have less than $10,000 saved for retirement.
But let’s put the big picture aside for a moment. How can you personally deal with why Americans don’t save money?
Like almost everything else, the answer is almost always found in thinking outside-the-box. Whatever “everyone else” is doing, do the opposite. Look closely at Reasons 2 through 7 above, and condition yourself to go in the opposite direction. And if Reason #1 is the cause, embark on a lifestyle of financial guerrilla warfare.
Find ways to increase your income, cut expenses, and get out of debt. From that point forward, become a committed saver. The Bible tells us “The rich rule over the poor, and the borrower is slave to the lender.” – Proverbs 22:7. If you sense something is fundamentally wrong with your finances, a lack of savings could be the heart of the problem.