Expressed as a ratio or a percentage, a savings rate is the amount of cash you take off your disposable income with the intention of stowing it away for retirement, a nest egg or any other personal goal you have.
As well as being put into a savings account with a bank, savings are also put into super low risk investments, such as non-aggressive stocks and bonds.
Average Savings Rates
The rate at which you save is your savings rate. In the 1970s, savings rates in the U.S. were at 7% – almost an all-time high until they were eclipsed by the 8% in 2008. However, in 2019, savings rates are down to as low as 1%, largely as a result of the 2008 recession. In March 2018, the average U.S. savings rate was 3.1% and has decreased further since.
Conversely, the Chinese savings rate is as high as 30%.
What Determines Our Savings Rate
Why are savings rates so low in the U.S. right now?
There are a few factors that determine our savings rate. These include the way the economy is structured at the time, how we spend our money, and how our culture looks at things like debt. Other factors include interest rate policies set by central banks, wage growth and more access to credit.
High consumption countries such as the U.S. tend to have lower savings rates because people are more in the mood to spend their hard-earned cash rather than save it. Whereas the great investor Warren Buffet was famous for saying “save first, spend what’s left,” many U.S. citizens are instead in the habit of spending first and then saving what’s left.
China, on the other hand, is a country where its citizens are better educated about investment, and thus it has a higher savings rate.
The Relationship Between The Economy and Savings Rate
Economic factors certainly have an impact on savings rates, especially in the U.S. where interest rates are known to have a positive effect. People start to realise that if they slowed their spending today and made a few sacrifices, they would have more money in the future. Called the Substitution Effect, this is when citizens delay instant gratification and spend less in the present.
On the other hand, a phenomenon known as the Income Effect has the opposite effect. When interest rates are lower, people begin to figure that they won’t accrue much from their savings, and thus choose to spend their money today instead.
As such, when interest rates are high, savings rates are higher. And vice-versa.
Another interesting correlation is that between income and savings rate. Low earners typically spend more (relatively speaking) than higher earners, or even wealthy people. When there is a recession, the economy needs people to start spending money again, and it’s often low earners who we turn to. Rather than put some money aside for a rainy day, low earners typically prefer to spend what they earn.
How Much Should I Save Each Month?
If you can set aside 20% of your monthly income for savings, great. More is even better. Then, you can spend 50% of your money on necessities and use the remaining 30% on discretionary items.