Saving for a Rainy Day – A Thing of the Past?

Do you remember saving your pocket money when you were a child, saving it all to buy that special toy? Washing your Dad’s car or mowing the lawn for a neighbor to make an extra few dollars? Do you put some of your disposable income aside each month or are you like the 60% of Americans who have less than $1’000 in savings?

The fact is, that people apparently have stopped saving. Perhaps this is due to interest rates remaining at a ridiculously low 1% or perhaps it’s the availability of credit. “Buy now, pay later” seems to be the motto now, rather than the traditional “start saving for a new car the minute you have bought one” philosophy.

Saving – The Trends

Fewer people are saving and those who are putting money aside on a regular basis are said to be saving less. According to two recent studies the percentage of savings out of disposable income has dropped from 11% in 2012 to below 5% in 2016. Indications are that those on low or middle incomes have pretty much stopped saving. Pension contributions were excluded from this survey, however the findings are quite stark. Experts explain, that people no longer have a “saving mindset” or just simply don’t have any spare cash at the end of each month. Only those on very high incomes are said to be making regular payments into savings and investment accounts.

In order to understand, just why saving for a rainy day no longer seems to be an option, I have looked at some to the possible reasons.

Why People are no Longer Saving

There are a few major factors to be considered:

  • Low Interest Rates: 1% interest rates are hardly an incentive to save, but these rates are likely to remain at this level for some time.
  • Availability of Credit: While credit is harder to come by than in the years preceding 2008, credit is still made available by often quite aggressive lenders. These firms offer credit at high rates and because they earn money from the interest paid, it is in their interest to keep individuals in debt.
  • Lack of Disposable Income: Many people may not have sufficient cash at their disposal and are not in a position to save at all.
  • Bank Charges: Particularly those on low incomes are penalized with comparatively high bank charges.
  • Different Mindset: The saving mentality of older generations seems to have vanished. People do not plan for their future, long term or short term, and prefer instead to perhaps use their annual bonus to make larger purchases.

Saving Makes Sense

Let’s say you need a car within 12 months, you decided to purchase a used car for $5’000. If you set aside roughly $100 per week, you will reach your target and will be able to buy your car. Alternatively, you don’t save and just before the purchase of your vehicle, you get a car loan. It takes no rocket scientist to figure out that you will be paying a lot more than $5’000 for your vehicle and interest payments alone will set you back considerably. The same applies to the use of credit cards, where it might seem convenient to buy before you actually have the cash, but in fact you end up paying a lot more for your purchase.

Even if you get a competitive lending rate of just over 4%, you still pay more so maybe we need to revert our brains to traditional thinking and “save to buy” rather than “buy to save”.