Since 2000 the savings rate in America could be compared to an expensive thrill ride at an amusement park. The country has gone through 2 recessions and the
savings rate, which is now just under 4% is back to where it was twelve years ago in the year 2000. What has happened in between has been a variety of ups, downs, and flat periods as the average American has put saving money at different priority levels.
The fact that the savings rate has been abysmal is only half of the problem. The other half of the equation is the location of those saved dollars. By blindly following what our parents have done we may be storing our money in some of the worst places available to us – all because we weren’t aware of other options.
Location, Location, Location
Ask the simple question “where do you save your money?” and the overwhelming majority of responses will be some form of government sponsored retirement plan (401k, 403B, IRA, Roth IRA, etc). Think for a second, however, where that money is actually placed and you will understand that money placed into traditional retirement vehicles is not saved money, but invested money. This is because money in these vehicles is completely at risk of market fluctuation and, as we saw in 2008, could be sliced in half almost overnight.
Couple the fact that Americans are barely saving 5% of their income with the fact that those savings dollars are fluctuating at the will of the market and you have the American savings dilemma. The results of this dilemma are devastating, all we have to do is look to the baby boomer generation. Many are having to work longer, live on less and in some extreme cases have lost everything. If we don’t make some severe changes and work to increase our financial IQ we just may find many of the same problems staring us in the face come retirement time.
How Do We Solve The Problem?
In order to solve this problem Americans need to get educated and get disciplined. Saving 5% simply won’t do the trick, especially if we continue to utilize the risky market-based vehicles we’ve watched fail over and over again. I think a good rule of thumb is to start by saving at least 10% of your income and work to continually save more.
Next, stay true to the idea of saving and put that money somewhere safe. Make sure it’s under your control, that it will never decrease in value and that there is a competitive return attached to it. There are a variety of vehicles available that offer all these advantages.
By making these changes to the way America saves money we can better our financial lives dramatically.
Nick Drzayich is a financial blogger focusing on non-traditional strategies such as infinite banking and IOP.