Gongol.com Archives: June 2012
Brian Gongol

June 1, 2012

Personal savings rate

Business and Finance Are you on track to save at least $1,289 this year?
If so, then you're doing better than the average American. The personal savings rate in April was 3.4%, or about $1,288 per person per year. The problem? That number just isn't going to cut it. And worse yet, it's clearly trending downwards -- towards the dismal 2% rate that prevailed in 2006 and 2007. ■ Personal savings forms the basis for a number of very useful things. First, it gives people at least some cushion against bad times...the classic "saving for a rainy day" that everyone should do. Companies have to do this by depreciating their assets, knowing that things wear out over time. Households need to do the same thing, since cars break down and furnaces give out and kids get sick. ■ By further extension, we need savings so that people can have something to live on when they retire. Americans, generally speaking, probably need about $1 million in savings and net assets of some sort or another at age 65 in order to afford a comfortable retirement without a lot of worry. Social Security is not a retirement plan. It's just not. It's a backup insurance policy against being destitute in old age. And there's no way that saving $1,288 a year is enough to get to $1 million. ■ The third leg of this stool is that personal savings equals wealth. You can't have wealth if you don't ensure that you consume less than you produce. A personal savings rate this low -- and 3.4% is far too low -- means that we're essentially eating our seed corn. Read Warren Buffett's 2003 essay on the US trade deficit: All told, we've sold off more than $2 trillion in American assets to the rest of the world to pay for our consumption of more than we produce. That's $2,470,989,000,000 at last count -- or about $8,000 for every man, woman, and child in this country. Many Americans don't even have $8,000 in their own net assets -- much less realize that the rest of the world owns that much more of our country, per person, than we own of anything anywhere else. If there's one iron rule of capitalism, it's that the one who owns the capital is the one who actually gains the wealth. And there are really only two kinds of capital: The things that are counted in that negative $2.5 trillion balance we have with the rest of the world...and human capital. And, while we're still pretty good at what we do here, our human capital is basically the output of what we put into our educational system. So unless we decide to make our schools phenomenally better and/or start investing more and consuming less, we're in deep trouble in the long term. ■ Bottom line: It's possible to become a nation of over-savers. Japan once had a personal savings rate of 15% -- which may be saving too much and spending (and enjoying life) too little. But a good rule of thumb has always been to target a savings rate of about 10%. Some of that will be lost to inflation over time, but as long as its invested with some shred of wisdom, that 10% amount generally produces enough for a comfortable household nest egg. 3.4% just isn't enough. Not nearly enough. ■ (As an aside...households that are putting money into education and training that actually stand a good prospect of earning a higher return in the future should consider their tuition spending to be the same thing as "savings", even if it technically doesn't look like that. If you're going to earn a meaningfully higher level of income as a result of that education, then it's a lot like putting money into savings -- as long as you follow the rule of saving a high percentage of your future [higher] earnings later on. But if you're burning those tuition dollars on a low-return degree program, then it's really just consumption, because it feels good but doesn't really make you wealthier in the future.)

News Where do these awful people come from?
Iowa's supreme court has ruled that it's a man's right to sue for fraud and be paid back for damages if a woman falsely claims a child is his. This begs two questions: How in the world was this not the law before? And, where do these awful people come from, who would knowingly lie about the paternity of a child, just to extract money out of someone who wasn't the child's father? In related awful-person news, a man is accused of killing his pregnant wife because he wanted to continue having an affair.

Iowa Sioux Center manufacturing plant will close
They make furnishings for the medical industry, and the company's owners say they just don't know how medical-care reform will affect the industry with enough certainty to keep the plant open.

Feedback link