Opening a savings account is usually one of the first step towards achieving your financial goals. If you ask anyone about the steps you need to take in order to get a hold of your finances the first they usually suggest is to get a hold of your spending (by creating a budget) and the second step is usually to establish an emergency fund. That emergency fund is often in the form of a (hopefully) high interest savings account. It’s just money you can put away, not touch and watch slowly grow. You’re less worried about achieving the highest possible rate of return but instead it’s more focused on having a stable supply of money you can draw upon in order to weather unpredictable financial storms. And although there are other conservative investment vehicles that achieve the same goals as savings accounts, the flexibility and ease of use make them especially attractive.
But savings accounts can serve purposes larger than just emergency funds. Right now I have three savings accounts set up. I have an emergency fund (which, thankfully, I’ve finally managed to fully fund), one for the money that I’m saving for a down payment on a house and finally, a longer-term savings account that I’m using to accumulate money for a loftier goal: opening a bar with a friend of mine some time in the future. While those goals are all different, they share a common thread: they all contain money that I’m not expecting to need anytime in the near future and I’m comfortable with having a modest return in exchange for the security of that money always being there.
And that is the beauty of savings accounts. I focus a lot of my energy on investing. Tinkering with my 401(k), IRAs and brokerage accounts in order to maximize my investment return. There is higher risk involved, but with those accounts, I’m comfortable with taking those risks and occasionally taking losses so that I can enjoy non-trivial returns. But those accounts could lose a lot of their value; even the most careful planning can become moot if there’s another stock market crash or I make a significant mistake resulting in an unfortunate loss. With that in mind, it’s comforting to know that I have caches of money that are far more stable, and if I get in a financial pinch, I can draw upon them and be ok. They are my financial security blanket.
The United States is the most consumer-driven economy in the world, and it represents up to 2/3rds of our total economy. With that being the case, historically the personal savings rate (as a percentage of disposable income) has been in a state of general decline since the early to mid 80s. Before that, starting from the late 1940s, the personal savings rate had generally remained flat with a slight upwards trend. The data for the years surrounding World War II are an interesting case study in an of themselves, as the country saw people save their money during the war years before post-war spending sharply cut that percentage. The year 2005 saw the personal savings rate dip below 0% for the first time since 1933. This was at the height of the run-up to the mortgage crisis that lead to the economic recession we’re currently digging ourselves out of. Probably the most interesting information comes from the last three years, during the aforementioned recession. At the beginning of that period the savings rate continued to drop as the initial hit of the economic crisis was felt and budgets tightened. However, 2008 saw a (relatively) sharp increase in savings, from a declining trend bottoming out at just over 1% in the 1st Quarter of 2008 to a rate of over 3% in the 2nd Quarter of 2008. A year later, in the 2nd Quarter of 2009, the personal savings rate jumped to nearly 5%. Many economists have suggested that this correlates to people weathering the initial storm, then taking stock of their financial situation and subsequently deciding to save more money. What will really be interesting is how those rates change as the recession continues and then when we do start our recovery. Will personal savings rates return to pre-recession lows, or will people decide to hedge against future economic downturns by saving more? That, of course, remains to be seen, but I will be monitoring it closely.
My savings has been pretty steady since I started working, even when I saw my incredible APY of around 4% cut to barely over 1%. Despite those irritating cuts, I’m still comfortable savings as much as I can – while hoping those rates eventually return to somewhere near those great rates I once enjoyed!
All data regarding the personal savings rate obtain from the U.S. Department of Commerce.
Update: This post was feautered on The Carnival of Twenty Something Finance