Save for your future self

As incomes rise, so do savings. Right?

Sadly, no. Savings rates in the United States are at historical lows despite the fact that disposable personal income has risen steadily since 1974, according to statistics from the Bureau of Economic Analysis (BEA).

Now I’m not just saying the savings habit has declined – I’m saying it has fallen off a cliff. The personal-savings rate in 1974 was 12.9 percent. The latest reported rate, for May 2018, was 3.2 percent (the personal-savings rate is saving as a percentage of disposable personal income). Over that 44-year period, disposable personal income has risen from a total of $3.9 trillion to $12.8 trillion in 2017 (in inflation-adjusted values).

The culprit? Spending.

Americans spend more and more every year. Again in inflationadjusted values, total spending in 1974 was $3.3 trillion, compared with a whopping $11.9 trillion in 2017. By “spending” I mean what the BEA calls “personal consumption expenditures,” or the total value of goods and services purchased by, or on behalf of, persons residing in the Unites States.

To bring these statistics into the present, the Commerce Department reported that retail spending rose 0.5 percent in June from the prior month, and revised the May gain from 0.8 percent to an historically high 1.3 percent. At the same time major U.S. banks are reporting a surge in loans taken out by consumers.

What are we spending all that money on? Some basic costs have soared, such as education and health care. Other areas represent conspicuous consumption, such as buying a bigger house than needed, one with three garages and a pool. And then there are our modern toys – the 70-inch TV set, the $1,000 mobile phone, laptops, tablets and SUVs. It doesn’t take a Certified Financial Planner (CFP) to tell you there will be a price to pay: The money you don’t put aside in savings and investment accounts today will not be there for you to maintain your standard of living when it’s time to retire.

How does your own savings rate compare with changes to your income? If you are earning more than you were five years ago, are you also saving more? If you want to bring your savings rate more in line with your income, start with these two steps:

Tame Your Spending. As we discussed in the previous article, you must first understand your expenditures before you can begin to bring your finances under control. Use your banking and other financial records to draw up a clear picture of all the places your money is going every month, from the mortgage to your morning coffee at the drive-thru. Take annual expenses such as taxes and insurance and break them down into monthly amounts.

Make Savings a Priority and Put It on AutoPilot. Once you understand your income and your outflows, decide how much money you can save (and invest) every month. This may require cutting back on (or cutting out) some expenses. Then make your savings plan automatic by contributing to your company’s 401(k) plan and/or an IRA. You can also enroll in automatic savings plan through your bank. The basic principal is “pay yourself first,” by making sure you put aside the first dollars that come out of your income every month for the sake of your future self.

Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Registered Representative, Securities offered through Cambridge Investment Research Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors Inc., A Registered Investment Advisor. Cambridge Investment Research Inc., and Connecticut Capital Management Group LLC are not affiliated.