United States Commerce Department reported during 2006, personal savings rate a negative one percent comparably the worst showing in seventy-three years. 1 The government’s Bureau of Economic Analysis calculates personal savings rate. The calculated personal savings rate equation: Add income of all types, and then deduct amount of personal taxes equal disposable income. Total amount of expenditures including rent, food, clothing and trivialities deducted from disposable income equal total amount for personal savings. The amount calculated could be negative cash flow: Expenses exceed disposable income. 5 Reported savings rate truthfully is a deceptive because theoretical equation or difference between earnings and expenditure does not include capital gains earned (or considered on paper) and appreciation or sale of tangible assets including real estate, art, collectibles, and cars. Senior Business Analyst at the Conference Board said:” I don’t think we are in negative territory. You have an enormous amount of savings that are not being reported – 401(k), all capital gains. If you put them in, you would have a savings rate that would be enormous.” Also, Investments in the Dow Jones Average 1993 – 1999 substantially increased from 3,300 to 9,100 (approximately) and currently over 13,900 in October 2007, reflecting enormous wealth appreciation or capital gains for many investors, however not recognized as part of the U.S. savings rate. 2 Certainly, capital losses from investments or loss from the sale of tangible assets offset capital gains collected over a period of time.
People living in poverty or individuals in a low-income bracket their savings rate likely reflects the Unites States savings rate more accurately, because their financial situation limits or prevents making investments or purchasing appreciating assets.
The U.S. Dollar depreciation against foreign currencies during the past year and recent months effects the U.S. Savings rate on the negative side of the equation. The cost of imported goods rise as the U.S. Dollar depreciates consequentially consumers may pay higher retail and grocery prices. Higher prices paid reduce disposal income faster and negatively affects savings rate for many families or individuals. However, retailers paying more for imported goods, may curtail passing on the increase to consumers, concerned holiday sales would be jeopardized by higher prices and keeping competitive prices retrospective of rival retail competitors. Many retailers will accept a lower profit margin. Example Wal-mart stories leading retailer for imported goods from China keeping every day low prices in their stores, despite any price increase for imported goods because depreciating U.S. Dollar currency. 3
When the number of adjustable rate mortgages and home equity borrowing increases people may not have sufficient income to match or exceed their financial obligations, subsequently consumer savings often utilized pay their creditors. Most of the time, recouping personal savings spend is very difficulty or may take many years to achieve, and realistically assuming reliable future income and no unexpected financial hardship occur in the future. Also, consumers unable to pay credit card obligations on time often seek financial relief by utilizing their savings. Especially, young people first time exposed using a credit card may spend beyond their means of personal income, and subsequently access their personal savings to pay credit card bills. 5
Regarding investing personal savings for financial gains: Citizens in countries around the world have a higher savings rate than in United States. However, citizens in countries such as France, Greece, and Italy do not invest their personal savings into the stock market nearly to the extent Americans invest. 4 Over the long term, U.S. stock market proven itself reliable source of economic prosperity for savings accounts, including Individual retirement accounts. Unfortunately during times of temporary economic downturns the stock market may not provide consumers safety for savings accounts. During the Depression unemployment rate increased substantially and many had no choice but pay their basic necessities from savings. 6 Also, savings accounts are jeopardized by unforeseen health emergencies, loss of job or recession, consequently low savings account may not be sufficient to pay financial obligations on time. “A low savings rate troubles economists because savings is needed to drive the economy.” 5 When an economy slows down because of a lack of consumer spending, not only from low income and consumers reluctance to spend their savings, attributes to a domino effect in the U.S economy: Supply or inventory for consumer goods increase, and prices tend to fall. Industrial production slows down or stops temporarily. Also, unemployment rate increases because of lay-offs.
A personal savings account by far, best method for individuals to take personal control of their savings, adding and investing wisely for retirement. Other types of savings account or retirement account include pensions funds, 401(k), other retirement savings plans and social security, providing no guaranty for sufficient income upon retirement or solvency. Custodial savings account specified for minors eighteen or younger and those age sixty and older. “This account is a safe, convenient way to save for the future while earning a steady rate of return or protecting someone’s inheritance.” 7 Health savings account provide coverage for qualified medical expenses at anytime without tax liability. However, when non-medical expenses are paid, penalties are similar to early withdrawals from an Individual retirement account. 8 Medical savings account is similar to a health saving account providing for medical expenses. 9
References:
1) Personal savings rate in USA reach Great Depression level http://english.pravda.ru/business/finance/02-02-2007/87023-personal_savings-0
2) Savings hits record low, or does it? http://www.csulb.edu/~rcelsi/savingsrate.htm
3) US Stocks down on Wal-Mart estimate http://www.news.com.au/story/0,10117,20833937-1702,00.html?from=public_js
4) USA: Lowest Savings Rate? or Hidden Assets? What’s Ahead, 2000 – 2010 http://www.thebullandbear.com/articles/1999/0699-savings.html
5) How long can households sustain negative savings? http://www.usatoday.com/money/perfi/general/2006-03-01-savings-cover-usat_x.htm
6) Savings Rate Worst Since 1933 http://consumerist.com/consumer/savings/savings-rate-worst-since-1933-233259.php
7) Custodial Savings http://www.firstsouthnc.com/savings/savings_accounts/custodial_savings.htm
8) Health savings account http://en.wikipedia.org/wiki/Health_savings_account
9) Medical savings account http://en.wikipedia.org/wiki/Medical_savings_account