Are you Saving Enough for the Next Crisis?

Are you saving enough money in an emergency savings account for the next crisis or recession? If you're like most Americans, probably not. During the last recession, which was dubbed the "Great Recession," the U.S. national savings rate soared even though savings rates hit record lows. The U.S. savings rate, not to be confused with savings rates, is the rate at which Americans save their money.

Are you Saving Enough for the Next Crisis?"Personal saving" also known as “the personal saving rate,” is calculated as the ratio of personal saving to DPI as a percentage of disposable personal income (DPI). The rate is released by the U.S. Department of Commerce: Bureau of Economic Analysis in the monthly Personal Income and Outlays report.




Just before the recession, the U.S savings rate was at 2.00 percent and the best savings rates available were around 5 percent. Soon after the financial crisis hit in May 2008, the U.S. savings rate jumped to 8.3 percent and the highest savings rates dropped to around 2 percent. Americans didn't save that much since December 1992 when the rate was at 8.9 percent.

The recession was supposed to bring new found austerity and savings to the country but that didn't last long. The 8.4 percent rate in May 2008 was the post crisis high, soon after the recession Americans started spending more and savings less as the rate dropped to a low of 3.1 percent in August 2009.

The most recent report released for the month of January 2013 showed the rate falling considerably from the December 2012 report. The personal savings rate in January was 2.4 percent, down from 6.4 percent in December 2012. The December number was a normality as pending tax increases in 2013 caused a jump in dividend payments, accelerated bonus payments, and other irregular pay in private wages and salaries.

When you compare the January number to October's of last year, the jump in savings isn't so pronounced. The October personal savings rate was 3.4 percent, more in line with January's number. The November rate of 4 percent was also a normality due to the pending tax increases in the new year.

The financial crisis brought to light the importance of savings for the country as a whole and for individuals. Countries that have the highest savings, such as China and Germany, weathered the crisis and recession much better than America did. Americans had to cut back considerably on spending, which made the recession worse in the U.S. than it was in China and Germany.

Granted, it is hard to be excited about saving money when the highest savings rates right now are at 1.00 percent. Saving should be looked at not just as an emergency fund but also as another long-term vehicle for goals and retirement.  Savings rates won't always be so low, and in the coming years rates will move higher. Depending on whom you believe, you can possibly expect rates to move considerably higher if the rate of inflation is high.
 
Author: Brian McKay
March 7th, 2013