Saving Today So We Can Live Better Tomorrow
About a month ago, we offered some comment here titled, "Better Living Through Shopping"; we explored people's motives for buying things and we also described the pleasure they derive from the process of shopping itself. People told market researchers that their main reason for making purchases is to improve their "quality of life".
Ah, "quality of life". Such an amorphous concept, it can explain many things we do. We eat nutritious foods, we get annual medical check-ups, we attend church. We also backpack in the woods (with only the latest camping gear), we take a course at the quilt shop in the charming little town 20 miles east, we attend a rock concert – these recreational activities provide important balance in our "quality of life".
We might also want to do these things "tomorrow". But, as we've documented well here, we've burdened ourselves with debt and we're cutting into our net worth in order to keep improving our lives "today". So what about "tomorrow"? That must have something to do with saving.
Only Half of Families Save
About half of the families in the country "save". That is, in the Federal Reserve's Survey of Consumer Finances for 2004, which we've explored before, 56% of families replied that they manage to keep their spending less than their income, so they have something left over to save. This ratio of savers in the population is lower than the 59% in the previous 2001 survey, but it is about even with the two previous polls.
This number seems low to us, but at the same time, virtually everyone has some kind of financial assets, according to this survey. And these assets are actually growing. Our problem in recent years has been that our liabilities have increased by even more, so that the population as a whole is more vulnerable to whatever "tomorrow" might bring.
Spending Is More Fun than Saving
Correcting this doesn't come easily. Shopping is fun, as we've noted, but saving isn't. It can be satisfying and comforting to have money in the bank, but there's not much pleasure in it. Back in the 1990s, many people also thought the stock market was exciting, but that good feeling vanished fairly abruptly when prices plunged with the "dot.com" bust.
Low Interest Rates Meant "Tomorrow" Wasn't Worth Much
Further, saving didn't really pay. Short-term interest rates dropped steeply during the 2001 recession and then again after 9/11. From late in 2002 until early last year, the rates we could get on bank deposits and money market funds were down around 1% and less than the rate of inflation. So what it did pay to do was spend money. If you saved your money for a year, you would earn so little interest on it that you wouldn't cover the inflation in the goods and services you might want to buy, and you'd be worse off than if you'd gone ahead and made those purchases.
Rates Higher Now, So Are Stocks
Interest rate conditions have changed over the last several months. Rates have increased in general and in particular on bank CDs and money market accounts. Several savings instruments now earn more than the rate of inflation. The stock market is gradually regaining favor as well. The Dow Jones Industrial Average finally got back up to its levels of early 2000 just a couple of weeks ago and has pushed through to new record highs. Several other widely watched stock market indexes are also nearing their earlier peaks. This move is actually a stronger one, based on greater consideration of fundamental company operations and finances than prevailed in the euphoric atmosphere of the late 1990s.
So we have conditions at banks and in financial markets that are more conducive to saving. Next time, as we did with spending, we'll talk about people's motives for doing that. In this case, our reasoning is still centered on "quality of life", but it's our life tomorrow that's at stake.
A Data Source
Meantime, if you are in the midst of financial decisions, we can suggest a handy website for calculating interest payments, deciding on a car rebate vs. lower loan interest, picking out a CD investment and so on. It's www.bankrate.com and it's full of free advice and all kinds of current consumer interest rate information not easily available elsewhere. There is advertising, but the service itself is long known as a provider of unbiased information and data on consumer saving.
Ah, "quality of life". Such an amorphous concept, it can explain many things we do. We eat nutritious foods, we get annual medical check-ups, we attend church. We also backpack in the woods (with only the latest camping gear), we take a course at the quilt shop in the charming little town 20 miles east, we attend a rock concert – these recreational activities provide important balance in our "quality of life".
We might also want to do these things "tomorrow". But, as we've documented well here, we've burdened ourselves with debt and we're cutting into our net worth in order to keep improving our lives "today". So what about "tomorrow"? That must have something to do with saving.
Only Half of Families Save
About half of the families in the country "save". That is, in the Federal Reserve's Survey of Consumer Finances for 2004, which we've explored before, 56% of families replied that they manage to keep their spending less than their income, so they have something left over to save. This ratio of savers in the population is lower than the 59% in the previous 2001 survey, but it is about even with the two previous polls.
This number seems low to us, but at the same time, virtually everyone has some kind of financial assets, according to this survey. And these assets are actually growing. Our problem in recent years has been that our liabilities have increased by even more, so that the population as a whole is more vulnerable to whatever "tomorrow" might bring.
Spending Is More Fun than Saving
Correcting this doesn't come easily. Shopping is fun, as we've noted, but saving isn't. It can be satisfying and comforting to have money in the bank, but there's not much pleasure in it. Back in the 1990s, many people also thought the stock market was exciting, but that good feeling vanished fairly abruptly when prices plunged with the "dot.com" bust.
Low Interest Rates Meant "Tomorrow" Wasn't Worth Much
Further, saving didn't really pay. Short-term interest rates dropped steeply during the 2001 recession and then again after 9/11. From late in 2002 until early last year, the rates we could get on bank deposits and money market funds were down around 1% and less than the rate of inflation. So what it did pay to do was spend money. If you saved your money for a year, you would earn so little interest on it that you wouldn't cover the inflation in the goods and services you might want to buy, and you'd be worse off than if you'd gone ahead and made those purchases.
Rates Higher Now, So Are Stocks
Interest rate conditions have changed over the last several months. Rates have increased in general and in particular on bank CDs and money market accounts. Several savings instruments now earn more than the rate of inflation. The stock market is gradually regaining favor as well. The Dow Jones Industrial Average finally got back up to its levels of early 2000 just a couple of weeks ago and has pushed through to new record highs. Several other widely watched stock market indexes are also nearing their earlier peaks. This move is actually a stronger one, based on greater consideration of fundamental company operations and finances than prevailed in the euphoric atmosphere of the late 1990s.
So we have conditions at banks and in financial markets that are more conducive to saving. Next time, as we did with spending, we'll talk about people's motives for doing that. In this case, our reasoning is still centered on "quality of life", but it's our life tomorrow that's at stake.
A Data Source
Meantime, if you are in the midst of financial decisions, we can suggest a handy website for calculating interest payments, deciding on a car rebate vs. lower loan interest, picking out a CD investment and so on. It's www.bankrate.com and it's full of free advice and all kinds of current consumer interest rate information not easily available elsewhere. There is advertising, but the service itself is long known as a provider of unbiased information and data on consumer saving.
posted by Carol S. | 10/11/2006 09:51:00 PM
3 Comments:
This is so helpful and encouraging.
My wife and I have developed a method of satisfying the urge to shop without buying. We pick up something in the store, hold it, read it, etc, then walk around continueing to shop holding the object in our hand or shopping cart. During the remainder of the time in the store we look for things we may actually need -- all the while thinking about what we are going to do with the object we want but don't need. It usually takes about 10 minutes for the thrill to subside and for an image to develop of the object sitting on a shelf somewhere in the house next to something else that we bought but did not need. At that point we carefully replace the item where it belongs in the store, and proceed to checkout.
Steve's idea sounds very constructive, doesn't it? When we wrote about consumers and their spending, we quoted Pamela Danziger, the market researcher, who described -- surprise, surprise -- how her studies show impulsive buying is right up there among people's reasons for "buying things we don't need". Steve and his wife seem to have found a way to check this impulse. Good for you, Steve, and thanks for writing in!
Post a Comment
<< Home