The 4 Reasons you don't save

We often hear that the savings rate in the US is either negative, or very very low - around a half a percent. We may also have read that the Chinese save over 10% of their income. What is going on?

The addition to savings from income is not the only factor in building our wealth. First the good news: the savings rate we see published does not include increases in the value of our net worth due to the increased value of our home or our investment accounts. We can be richer without actually adding to our savings from income. In fact, in the period 1982 to 2006, the wealth of all US residents increased by an average of 7.2% per year. The bad news, of course, is that this also works in reverse and our net worth, our wealth, can decrease if the market goes against us - which it is for most of us at present. If we were counting on ever increasing market values to provide sufficient retirement savings, we have had a rude awakening this past year. Indeed, since the 7.2% exceeded the increase in Gross Domestic Product, it was bound to reduce at some point to come back into balance. We can now expect increases in our national wealth of only 2 - 3% for a period of some years for it all to average out.

So if the markets will not assist us to grow our wealth, we need to take another look at saving from income. The definition of saving is to forego consumption now in order to provide for the future. Putting money aside both increases the our savings and reduces our discretionary income, depressing our ability to spend. Our lowered lifestyle makes the savings last even longer.

If we are not currenly saving, is it because we don't care about the future, or are looking forward to poverty, or think that our kids will take care of us, or because we anticipate an early death? Obviously not!

The more likely reasons are probably these:

a) procrastination - we just haven't got around to looking into this yet,
b) we have a hard time understanding how much we need to save to meet our goals,
c) we have not calculated how much our savings will be worth at retirement, compared with how much we will need,
d) we have consumption habits we just don't want to give up.

We like to think we are in control of our lives, but in reality we often lack knowledge or experience in doing what we need to do. We need help from the outside, a push to do the right thing. One of the best recent actions to promote savings was that employers can now include new employees in their company's 401k plan by default, instead of them having to sign-up. In addition, employees can have their contributions automatically increase with each salary increase. This is an example of how a simple external force can have a beneficial effect on our future.

Employees who contribute to their 401(k) plan and are willing to make small improvements to their saving and investing habits can increase their future income potential. However, employers aren't in a position to regularly assess your overall expenditures, assets, and income situation as a financial planner would. Neither can they give one-on-one counseling, or walk you through a process to put together a package of your individual needs.

I have the tools to put into practice what is needed to secure your future. If you are not sure how much you should be saving, or are not saving at all, please consider getting help.

For more on how much to save, click here.

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