Money, Spending versus Saving

The savings rate of Americans went negative in 2005.
An area where families spent instead of saved was on amenities in their homes.

This is an excerpt from American's Debt: Worse than You Think? an article on Yahoo Finance written by Laura Rowley, February 17, 2006. I've put highlights in bold.

That's problematic, according to Paul Kasriel, director of economic research at Northern Trust in Chicago. "I see a lot of people buying houses that seem to have a very large consumption element to them -- like granite kitchen countertops and the huge increase in square footage per person."

So Kasriel does his own calculation of the savings rate. He subtracts not only outlays on goods and services, but also spending on a line item called "residential investment." It represents the value-added in housing -- the kitchen renovation, the family-room addition. (It also includes commissions paid to real estate brokers.)

According to Kasriel's calculation, last year [2005] Americans spent approximately $472 billion more than they earned after taxes -- a negative savings rate of 5.2 percent. That spending is double the previous year -- and a record high.

Going back to 1929, Kasriel found just a dozen years in which households spent more than they earned by his calculation. Two were during the Great Depression. Three were in the decade following World War II, when consumers unleashed pent-up savings accumulated during the war (when there was little available to consume). The other seven years of negative savings have occurred since 1999.

"What's amazing is that my generation, the rapidly aging Baby Boomers, are entering their prime saving years," Kasriel says. Most of the Boomers, representing nearly a quarter of the population, are in their peak earning years (42 to 60). Many are becoming empty nesters, so their expenses should be declining. They already own the durable goods one acquires in the early stages of adult life. "But however you slice or dice it, we aren't saving," Kasriel says.

Think before you spend. Is what you're going to buy a necessity and how will it make you feel if it gets chipped, broken, dirty, etc?

Laura Rowley writes on Money & Happiness. Visit her web site here:

Money & Happiness