Americans can save a lot of money if we want to, don't worry!

Americans can save a lot of money if we want to, don’t worry!

During the pandemic, we’ve learned that Americans can save a lot more money if we want to. Take a look at the historical chart of the US Personal Savings Rate according to the US Bureau of Economic Analysis and the St. Louis Fed.

US Personal Savings Rate Chart Percentages

After the shutdowns began on March 18, 2020, the personal savings rate in the United States skyrocketed from a respectable 9.3% before the pandemic to an impressive 33.8% in April 2020! Americans have suddenly decided that saving money during a time of great uncertainty is a priority. So that’s what we did.

As the initial six-month shock of the pandemic began to wear off, Americans decided to cut our savings rate to 13.3% in November 2020. Then, when news of a new strain of COVID is appeared at the beginning of 2021, Americans decided to increase our savings rate again, reaching 26.3% in April 2021.

Since April 2021, the personal savings rate has steadily declined thanks to vaccines, experience, and the desire for most of us to continue living.

Today, the personal savings rate in the United States is around 3.1%, a low not seen since January 2008.

Americans can save more if we want or need it

Since 2009, when I started writing on Financial Samurai, I’ve noticed that some people like to dig into the state of personal finances in the United States. I was one of them, with articles like Retirement Savings By Age Show Why We’re Screwed.

At the time, I said to myself: How is it possible that the median amount of retirement savings for 32 to 37 year olds was only $480 using 2013 data? Meanwhile, the median amount of retirement savings for people aged 56 to 61 was just $17,000.

Even though we have quadrupled the amounts for 2022 and beyond, the retirement savings amounts are not enough to live a comfortable retirement.

Median retirement savings by age

I wanted to write more personal finance articles to help people save and invest more for their future. But what I realize now is that I just hadn’t lived long enough to see how adaptable people can be.

Almost a decade has passed and the typical American retiree isn’t screwed. We don’t hear about a retirement crisis where people over 60 are thrown out on the streets because they don’t have enough money to pay their bills.

Instead, the typical American got rich. We may not be happier, but at least overall we are more secure financially than in the past.

Why are Americans doing so well?

Despite paltry median amounts of retirement savings, the typical American is doing well.

The majority of Americans have benefited from an extraordinary rise in home prices since 2013. The combination of rising home prices, rising home equity and falling mortgage balances is a huge win for the ~68% of Americans who own real estate.

Home Equity - Why Americans Are Doing So Well
Median house price - why Americans are doing so well

For the 32% of Americans who don’t own real estate, the common belief is that renters save and invest the difference. Thus, the percentage of stock ownership among renters may be even higher than the estimated 56% of all Americans who own stocks. Stocks have also had a fantastic run since the 2013 Consumer Finances Report.

Real median household income also bottomed out in 2012 at around $60,000. In 2021, real median household income peaked at around $71,000.

Real median household income

Finally, federal and state governments have provided support during the pandemic. They pumped trillions into the economy via stimulus checks, PPP loans, etc.

Recommended savings percentage for financial freedom

Whenever someone asks me how much they should save for financial freedom, my default answer is 50% of your after-tax income.

A savings rate of 50% means that every year you save is a purchased year of freedom. Save 50% for 20 years and you’ve got yourself 20 years of back-end freedom. The calculation is intuitive and easy.

A more nuanced answer to the recommended savings percentage is to ask everyone to max out their tax-advantaged retirement accounts. Once done, save at least 20% your after-tax and post-retirement contribution income.

Maximizing your 401(k) should become automatic. You should focus on building as large a portfolio of taxable investments as possible. It is your taxable investments that will generate enough passive income for you to live more freely.

Your savings rate will be determined by your income and expenses. But your savings rate will also be determined by how badly you want to retire early and do something new. As we saw in the St. Louis Fed personal savings rate chart, we can save more if we really want to.

Savings Rate Recommendation Chart for Financial Freedom

Here is my financial freedom savings rate chart from Buy This, Not That. The higher your savings rate, the sooner you will be free.

My book contains many charts as financial guides to help you build more wealth in a risk-appropriate way. When it comes to your money, don’t just steal it. Be everywhere in your money.

Table of recommended savings rates by age

Don’t count the American saver

I no longer believe that the typical American will face a difficult retirement. Many of us have the ability to save more money when situations deem it necessary. We will also rationally spend more money when we feel safer.

Think about it. If your doctor told you there’s a 90% chance you’ll die within a year if you don’t lose 10 pounds in the next three months, don’t you think you’d do everything possible to lose weight? weight ? Most able-bodied people would.

Do not rely on free will!

We can also accept the new three-legged retirement stool where we rely only on ourselves for retirement. Relying on others to save us is not a good financial strategy!

Then, when we reach the traditional retirement age, Social Security grants us an additional “bonus”. The maximum Social Security benefit is over $4,200 a month in 2023. Granted, most of us can live just fine on $50,000 a year once our homes are paid for.

We may be saving too much

For personal finance enthusiasts with above-average net worth, we’re probably dying with too much money. A life of frugality and wise investment is hard to change. Therefore, we must work to decumulate our wealth so that we do not end up wasting our youth.

Of course, there will always be people who hurt for money. But I am confident that these people will rationally take steps to improve their financial situation over time.

With so many free online resources and affordable personal finance books to read, personal finance education is headed right! The average person will rationally take the right steps to improve a suboptimal situation.

Let’s just hope the average person doesn’t go into revolving credit card debt either. It would be irrational!

Personal Savings Rate vs. Credit Card Debt

Questions and recommendations from readers

Readers, do you think Americans can save a lot more money if we want to? Why do you think Americans don’t save more money than people in other countries? Is our low savings rate a sign of financial health? What is your personal savings rate?

In addition to buying treasury bills with your savings, CIT Bank also offers an attractive 18-month CD rate at 4.25%. Before the Fed began aggressively raising rates, Treasury yields and CD rates were below 1%. You can check out the 18 month CD here to enjoy higher guaranteed returns.

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