You've Got Savings!

According to the latest survey, anyway in which 31% of Americans said they have at least six months’ worth of expenses saved up. It’s not as many of you as we’d like, but it is a significant improvement on the 22% who answered the same way in 2015.

The survey was conducted by Princeton Research Associates for and only included about 1,000 respondents, so it is by no means a definitive look at American finances. It is substantial enough, however, to start a discussion. Savings rates tell us a good deal about how stable our households are and how well our economy is serving the general public. They also tell us how we feel about our own prospects and the economy.

Everyone knows that we should put aside about 3-6 months’ worth of expenses in case of emergencies. Because of our private health care system, our disproportionately expensive housing and our weak labor laws, Americans are more likely to need this cushion than citizens of other wealthy nations. Some of us struggle to put that money aside because of overspending on things we could do without. Others simply don’t have enough room in the budget between the money they earn and basic expenses.

For those who can save, though, the question of whether or how much to save is often answered (often subconsciously) by how good we feel. It turns out that when our home values and stocks accounts are up, we get a lot more comfortable with spending our money or taking on more debt. This is true even though we know the values of our homes and stocks can fluctuate wildly. Unfortunately, this feeling means that Americans are tempted to go further into debt (and go light on savings) at the peak of a market.

You can imagine the result: as home values and stock markets climb to unsustainable levels, Americans take on bigger mortgages, larger car loans and more credit card debt. When the crash inevitably comes, we are in a precarious position to cope with it. Known as the “Wealth Effect,” economists have pointed to this phenomenon to explain why our Personal Savings Rate (personal savings divided by disposable personal income) has been so low when the rest of the economy is looking great and so high when things are dodgy. The Personal Savings Rate in the U.S. was almost 13% in 1970 but had sunk to around 3% in the two years high-flying years before the Great Market Crash of 2008. We are now hovering steadily just over 5%.

All of this should make us more aware of how unreliable gut instincts and consumer sentiment can be when it comes to economic conditions. And if you are one of the 6 in 10 Americans who does not have a savings account to reach for in case of an unexpected bill, this is a great time to do something about that.