The U.S. Personal Savings Rate is Plummeting. But Yours Should be Rising.

Long-time readers here know that personal savings rate is one of my favorite personal finance metrics (along with safe withdrawal rate, crossover point, net worth, and “usable net worth”, to name a few).

No other metric is as apt at diagnosing your current “personal business” of household cash flow management. In its simplest form,

Personal savings rate (over a specified period of time) = net savings (or losses) / total income

If you can boost your personal savings rate up to high enough levels, you can start to make some crazy fast progress in paying down debts or saving for retirement. For example, at a 75% personal savings rate, you’d be saving 3 years of living expenses for each year of work you complete. Just 10 years of that, and you could virtually retire!

But Americans don’t do that, or anything close to that.

According to recent Federal Reserve data, the U.S. personal savings rate has plummeted to just a hair above an all-time low of around 3.7%.

average personal savings rate US

A 3.7% savings rate would be alarming at any time. If averaged throughout one’s career, it would take approximately 27 years of “savings” to equal one year of living expenses. It’s no wonder Social Security is quite literally a life-saver for many. Most Americans hit retirement age with shockingly low average retirement savings, after a lifetime of work.

But it’s particularly alarming to see personal savings rates this low right now, given that the last (and only) time it had previously reached these depths was just before the Great Recession, in 2008. And it’s even more alarming that it’s at these depths during a time when we just reached the highest median household income level in history.

In short, we’re making more money than at any point in recorded history, but we’re saving a smaller percentage of it than at any point in recorded history. That’s a problem.

The Short-Term Psychology Behind Personal Savings Rate

It’s hard to pinpoint exactly why this phenomenon is happening. Among other things, a few likely contributors to this overall downward trend in personal savings rate include:

  • the continuing rise of wasteful consumerism and bigger homes in our culture
  • companies are better at marketing, advertising, and separating our money from us than ever before
  • the ease of a swiping a card and paying it off later
  • housing prices are indexed near all-time highs
  • education costs and tuition debts are at all-time highs
  • health care costs are at all-time highs

But I think that there is one thing, more than any other, that explains this phenomenon: Americans have developed an extremely short-term focus on their finances.

In the graph above, take a look at what happened in early 2009, at the bleak depths of the Great Recession. Unemployment had skyrocketed to 10%, median household income was declining, and what happened to the personal savings rate? It tripled to 7.5%!!

The money was there to be saved and knowledge was there to do it, but it took the fear of another Great Depression to scare people into actually giving a damn about how much they were saving. The short-term focus was FEAR, and it scared a lot of people into improving their savings quite a bit, regardless of all those listed challenges.

Fast forward to 2024. We’ve seen job growth in every month 2020, unemployment is near an all time-low, we’re near record high wages, and people are generally feeling good about the economy. So what are they doing? Spending, of course! Again – short-term focus.

Here’s the thing – it would be wise, very wise to do just the opposite in expansionary times.

It can be difficult, very difficult to raise your personal savings rate in a recession (and impossible if you lose your job). The easiest and most common sense time to do it is during times of economic expansion. Governments (wise ones) raise revenues and run surpluses in times of expansion, smart businesses stockpile profits. THEY prepare for rainy days, and YOU should too, by ratcheting up your personal savings rate.

After years of economic expansion, the next recession could be right around the corner. Don’t wait until then to remember what it’s like to save.

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