During the pandemic, we’ve learned that Americans can save a lot of money if we want to. Take a look at a historical chart of the US personal savings rate, according to the US Bureau of Economic Analysis and the St. Louis Federal Reserve.
After lockdowns began on March 18, 2020, the US personal savings rate jumped from a respectable 9.3% pre-pandemic to a respectable 33.8% in April 2020! Americans suddenly decided that saving money in a time of great uncertainty was a priority. So that’s what we did.
When the initial six-month shock of the pandemic began to wear off, Americans decided to lower our savings rate to 13.3% in November 2020. Then, when news broke of a new strain of COVID at the beginning of 2021, Americans decided to increase again, our savings rate hit to 26.3% in April 2021.
Since April 2021, the personal savings rate has been steadily declining thanks to vaccines, experience, and the desire of most of us to get on with our lives.
The personal savings rate in the United States today is about 3.1%, a low not seen since January 2008.
Americans can save more if we want or need to
Since 2009, when I first started writing for Financial Samurai, I’ve noticed that some people like to learn about America’s personal financial situation. I was one of them, with publications like Retirement Savings by Age showing why we’re screwed.
At that time, I said to myself: How can the average amount of retirement savings for people ages 32-37 be just $480 using 2013 data? Meanwhile, the average amount of retirement savings for those ages 56 to 61 was just $17,000.
Even if we quadruple the amounts for 2022 and beyond, the amounts of retirement savings are not enough to live a comfortable retirement lifestyle.
My business has been launched to write more personal finance articles to help people save and invest more for their future. But what I realize now is that I simply didn’t live long enough to see how well people can adapt.
It’s been nearly a decade and the average retired American hasn’t gotten away with it. We don’t hear about a retirement crisis where people over 60 are thrown out into the streets because they don’t have enough money to pay their bills.
Instead, the average American just got richer. We may not be happier, but at least overall we are more financially secure than we were in the past.
Why do Americans do so well?
Despite paltry amounts of retirement savings, the average American does well.
The majority of Americans have benefited from the extraordinary rise in home prices since 2013. The combination of rising home prices, rising home equity, and declining mortgage balances is a big win for the roughly 68% of Americans who own property.
For the 32% of Americans who don’t own property, the common belief is that renters save and invest the difference. Thus, the proportion of stock ownership among tenants may be greater than the estimated 56% of all Americans who own stock. Stocks have also had an impressive performance since the 2013 Consumer Finances report.
The real median household income also fell in 2012 at about $60,000. In 2021, real median household income peaked at around $71,000.
Finally, both the federal and state governments have been supportive during the pandemic. They have pumped trillions of dollars into the economy through stimulus checks, PPP loans, and more.
Recommended savings ratio for financial freedom
When someone asks me how much they should save to reach financial freedom, my default answer is 50% of your income after taxes.
A savings rate of 50% means that every year you save is one year of buying freedom. Save 50% for 20 years and you bought yourself 20 years of freedom on the back end. Mathematics is intuitive and easy.
The most accurate recommended answer to the savings ratio is to have everyone benefit from tax-advantaged retirement accounts. Once that’s done, save at least 20% The income from your after-tax and post-retirement contributions.
It should become automatic to max out your 401(k). Your focus should be on building the largest taxable investment portfolio as possible. It is your taxable investments that will provide enough passive income so that you can live more freely.
Your savings rate will be determined by your income and expenses. But your savings rate will also be determined by How much do you want to retire early and do something new. As we saw in the personal savings rate scheme by the Federal Reserve Bank of St. Louis, we can save more if we really want to.
Financial Freedom Provider Rate Recommendation Scheme
Here’s my Financial Freedom Savings Rate Chart from Buy This, Not That. The higher your savings rate, the faster you can get free time.
My book contains a lot of blueprints as a financial guide to help you build more wealth in a risk-friendly way. When it comes to your money, don’t be content with it. Be above your money.
Don’t count on the American saver
I no longer believe that the average American will face a difficult retirement. Many of us have the ability to save more money when situations deem it necessary. We will also spend more money rationally when we feel more secure.
think about it. If your doctor told you there was a 90% chance that you would die within one year if you didn’t lose 10 pounds in the next three months, wouldn’t you think you would do everything possible to lose weight? Most healthy people will.
Free will does not count!
We can also accept the new three-legged retirement chair as we only rely on ourselves for retirement. Relying on others to save us is not a good financial strategy!
Then, when we reach the traditional retirement age, Social Security provides us with an additional “bonus.” The Social Security benefit cap will be over $4,200 a month in 2023. And sure, most of us can live with a $50,000-a-year fine once our homes are paid off.
We may save a lot
For personal finance enthusiasts with above-average net worths, we’re probably going to die with a lot of money. It is difficult to change the age of frugal and intelligent investment. Therefore, we must work to squander our wealth so as not to waste our youth in the end.
Of course, there will always be people who get hurt for money. But I am confident that these people will take rational measures to improve their financial situation over time.
With so many free online resources and affordable personal finance books to read, personal finance education is trending right! The average person will rationally take the right steps to improve a suboptimal situation.
Let’s just hope the average person doesn’t also get into revolving credit card debt. Now that would be illogical!
Reader questions and recommendations
Readers, do you think Americans can save a lot of money if we want to? Why do you think Americans don’t save more money as citizens of other countries do? Is our low savings rate a sign of financial health? What is your personal savings rate?
In addition to buying Treasury bonds with your savings, CIT Bank also offers an attractive 18-month savings rate of 4.25%. Before the Fed started aggressively raising interest rates, Treasury yields and cash deposit rates were less than 1%. You can check out our 18-month CD here to take advantage of higher guaranteed returns.
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