The personal savings rate shows the amount of money an average American puts away after paying for expenses and taxes. This amount could be their emergency fund saved in a checking account or
high-yield savings account. Americans are no longer saving as much as they used to. Our research shows that over 45% Americans manage to save less than 5% of their income and this can make achieving financial goals challenging. Households may find it tough to weather an economic downturn if they have limited savings.
High-income earners managed to save a higher percentage of their income as compared to low income earners. Majority of the respondents have debt. The lack of savings means that many Americans are living paycheck to paycheck. If you find yourself in this group, read on to dive deeper into why the savings rate is dropping and what you can do to save more than 5% of your income.
Reasons behind low savings in America
Let’s take a look at the most common reasons behind the low personal savings rate in America.
High cost of living
There has been a surge in the cost of living after the pandemic. Everything from rent to home prices, healthcare, education and food has become expensive, leaving less for savings. The rise in living expenses has outpaced income growth leading to financial strain on households.
important: The personal savings rate in America is 4.6% as per Federal Reserve data.
Stagnant wages
Despite the rising cost of living, the wage growth has been negligible. It has been stagnant for many years and household income has not been able to keep pace with inflation. This has made it difficult for Americans to save from their income. Due to this, many Americans are living paycheck to paycheck. They have little left after paying for the monthly expenses and are unable to work towards the future savings goals.
Growing debt burden
Several Americans carry debt, it could be credit card debt, student loans or medical bills. This debt has always taken precedence over saving and has limited the amount that households can save.
Economic uncertainty
The recent period of economic uncertainty has become challenging for many households. We have gone from a recession to an inflation and seen many wage cuts and layoffs. This can disrupt even the best savings plan. Individuals going through this may feel financially insecure and find it difficult to build a savings plan. An unexpected expense like medical emergency or car repair during a period of economic uncertainty could prevent saving altogether.
Inadequate financial literacy
I cannot place enough emphasis on financial literacy. Not many U.S. adults are financially literate and the lack of financial discipline and money management skills puts them in a challenging position. It could lead to lack of financial planning, budgeting and sometimes, impulsive spending. Many aren’t aware of the different types of
debt repayment methods, retirement savings or investing strategies. Due to this, they miss out on making the right money-related decisions.
Ways to improve savings
Budget
The first step to take is to know where the money is going. By creating a budget, you can identify the areas where your money is going and look for ways to save. You can create a budget on a spreadsheet and list out all the areas where you spend money. Alternatively, you can use budgeting apps like
YNAB or Pocket Guard to get insights into your spending habits. Once you have the budget, identify all the discretionary expenses and set limits on them. Try cutting out the daily coffee or dining out to free up the money for saving.
Start an emergency fund
One of the best ways to start saving is to
build an emergency fund. Set aside a certain amount of money each month and forget about it. The money should go directly into your savings account on the payday and you should not touch it until there’s an emergency. An emergency saving is meant for emergency expenses and you should not use this money unless it is really necessary. The financial security of an emergency fund will give you peace of mind.
Increase retirement contribution
Employer-sponsored retirement plans like 401(k) will come with employer matching and this is a chance for you to grow the funds in your retirement account. Make the most of the matching contribution. If you do not contribute enough to get the match, you are just leaving free money on the table. Even a small amount in the IRA can grow significantly over time.
Start small
Do not aim for a high savings rate and wait until you reach there. Start small and start now. Incremental increases and compounding will help your money grow. Even if you can only manage to save 3% of your income right now, keep doing it. Over time, this amount will add up and you will have enough money to invest.
Pay off debt
Debt will hold back your ability to save and if you can manage to pay down the high-interest debt, you will be able to have adequate cash flow to increase savings. Consider debt pay off strategies like debt snowball method or debt avalanche method and try to pay off as much debt as you can. Once you are debt-free, you will have more money to put into your savings account.
To keep yourself on track, make use of financial tools like YNAB, or
Rocket Money. Regularly check in the amount you’ve saved and the progress you’ve made. This will keep you motivated to keep going. You can also seek guidance from a financial advisor on how to go about saving and investing. Once you hit a savings milestone, reward yourself for the discipline and stay consistent. It is always about the small steps you take that add up to a big milestone.
