Wednesday, January 26, 2011

What is your savings rate?

In an article published today over at MSNBC the personal saving rate is currently 5.3%, which means that Americans are not spending every last dollar they earn.  While this is better than where we were in 2006 when it was at -2.4% there is actually a fine line between saving to much and saving to little.

Our economy is consumption driven, or as you have all heard a hundred times, supply and demand.  When the stock market shred 7,000 points in 2008 people stopped buying and started saving their paycheck.  Unfortunately this only made matters worse as everything is cyclical.  The more people saved the more businesses struggled which caused more layoffs which sparked more fear and thus made people save even more.

So, what can you do?  I think that having a 5% savings rate is healthy as long as it is in line with your long term goals.  If you are carrying credit card debt with an interest rate of 24.99% it makes little sense for you to save 5% of your income in a bank paying less than 1% interest.

The answer to this question is like the answer to most questions, everything in moderation.  A lot of financial websites will tell you to have three to six months of living expenses in a savings account in case of an emergency. After that is accomplished you can really focus on paying down debt and saving for your long term goals.  The crux is that I truly don't know very many people who have built up an emergency savings account.  So if you can't do six months, how about you start with $500.

In the mean time, ask yourself if you are comfortable with your personal savings rate and what steps are you going to take to fix it?

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