Why Are People Saving Less?

The Bureau of Economic Analysis just released U.S. personal savings rate data for the month of July. This is the percentage of people’s income left over to save each month after spending and taxes.

As of the end of July 2024, the average U.S. savings rate was 2.9%.

This is the first time the national average savings rate has dipped below 3% since April of 2008.

As you can see from the graph, the savings rate exploded to a whopping 32% at the onset of the pandemic and has been steadily declining ever since. Dating back to 1960, the long-term average has been a little over 8%, but as of this century, the percentage has hovered around 4%.

One explanation for why savings have dropped to their lowest level in over 16 years could be that things cost more now due to inflation and people are feeling the pinch.

I think a lot of people would agree with that reasoning. According to a survey from Forbes, nearly half of all respondents said they anticipate saving less money in 2024 than they have in the past.

The primary factor cited across all age groups was a rising cost of living.

However, on the other hand, I wonder if savings going down could be evidence of the opposite. Are consumer finances so good right now that many people don’t think they have to save as much?

The unemployment rate remains historically low, the stock market has produced great returns over the past year, and the value of people’s homes continues to go up.

According to the Federal Reserve, the collective wealth of millennials and older Gen Z stood at $14.2 trillion, which is up from $4.5 trillion just four years earlier. Adjusting for inflation, millennials currently have about 25% more wealth than Gen X and Baby Boomers did at a similar age.

I even saw this crazy statistic recently that 68% of millennials and Gen Z have received or expect to receive an inheritance of nearly $320,000 on average. Additionally, 52% of. millennials think they’ll get even more—at least $350,000.

The number of people aged 65 and older is the fastest growing group in the U.S. and there seems to be quite a bit of money coming down the pipeline.

Do anticipated inheritances play a role in declining savings rates as well?

Listen, I don’t know the exact cause for why Americans are saving less. The answer is probably due to a myriad of contributing factors. But we are a nation of spenders. Once we’re comfortable living a certain lifestyle, it’s very difficult to cut back.

When the price of the things we like to do goes up, we’ll complain about rising prices incessantly, but in the end, we tend to just pay the higher prices.

How much you should save depends heavily on how much you spend and your own personal situation, but as a general rule, saving anywhere from 15% to 20% of your total gross income is a healthy goal.

I know, that rule of thumb is far easier said than done. But a crucial financial skill is being able to set aside money for your future regardless of external economic conditions.

If there is one thing I know for certain, it’s that a 2.9% savings rate will not be sufficient for most people to reach their financial goals.

Thanks for reading!