National Savings Rate Revisited

Posted by Mike Smith :: December 6, 2007 @ 5:36 am

As regular readers of the Lending Club blog are aware, the savings rate in our country is hovering around zero. This year the rate was even reported to be below zero. While this number is clearly not sustainable, it also begs the question about the accuracy of the method of calculation.

There are many ways to calculate how much money people are (or aren’t) saving. The rate frequently quoted in the media is the one provided by the US Bureau of Economic Analysis, but there are some limitations to that number that cause it to be misleading.

The method used to calculate it is to look at the post-tax income of the average American and compare that with their spending. The difference is the amount that they save. The problem with this method is two-fold. First, many Americans do a large percentage of their savings pre-tax by using tax-deferred investment vehicles like 401K retirement plans. Second, not all spending is equal. Clearly buying consumable items like food, clothing, and electronics are true spending items. Other expenses, such as your home or another investment, are not as easy to quantify.

Paying your mortgage each month, which may seem like an expense, is also a savings method for many people because a portion of the payment is used to build equity in your home. Other investments with the potential for interest or capital gains face similar ambiguity. If you invest in a person-to-person loan portfolio with Lending Club, you may do so to get a better rate than you would get by saving your money with a bank. Such an investment however, looks like an expense when using the government’s simplistic method of determining the personal savings rate.

More intangible investments have similar problems. If you spend money on an education, would you be better off than if you saved the money? If the value of what you learn enabled you to earn more money in the future, then you likely would be better off spending the money in such a way.

Spending more than you have left after taxes probably isn’t a good habit, but it doesn’t necessarily mean that you’re not saving. The concept of “saving” is more complex than what can be easily measured for the average American. As such, I recommend looking at your own individual finances to determine if you are saving an appropriate amount. By considering your tax-deferred contributions, your investments, and your spending to increase your future earnings, you’ll have a much better understanding of your own savings habits than any government statistic could hope to provide.