Personal savings drop in 2006

[musicman]

People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.

The Commerce Department reported today that the savings rate for all of 2006 was a negative 1 percent, meaning that not only did people spend all the money they earned but they also dipped into savings or increased borrowing to finance purchases. The 2006 figure was lower than a negative 0.4 percent in 2005 and was the poorest showing since a negative 1.5 percent savings rate in 1933 during the Great Depression.

For December, consumer spending rose a solid 0.7 percent, the best showing in five months, while incomes rose by 0.5 percent, both figures matching Wall Street expectations.

The savings rate has been negative for an entire year only four times in history

[TJones]

People wanted to buy more stuff last year because new toys and gadgets keep coming out, and we have been programmed to think we NEED that new Chocolate phone or the new windows application or we won't be able to function. Keeping up with the Joneses can sometimes put you in the hole.

[TheNiche]

Whatever the reason for the low savings, economists warn that it the phenomenon exists at a particularly bad time with 78 million baby boomers approaching retirement age. Instead of building up savings to use during retirement, baby boomers are continuing to spend all their earnings.

This is the big (and unpublicized) problem with social security and other government programs that go to benefit the elderly. If some amount of income is guaranteed by the feds, there is less incentive to save.

Imagine yourself in the position of a boomer. You've never known an American citizen that was not eligible for social security. The notion of guaranteed benefits is ingrained into the financial psychology. There is absolutely no threat to subsistence. So that diminishes the motivation to save. Instead, you consume.

Consumption provides a short-term benefit to the economy, but its effects are not lasting, nor do they promote a great deal of capital growth. Savings, on the other hand, is just money that will be lent to businesses seeking an opportunity to expand. Savings = Investment. And when more firms can expand, they generate streams of revenue in excess of what was put into them. Part of that excess will go back into savings/investment, furthering the cycle along, and resulting in a compounded growth pattern.

But boomers have been underinvesting...and you can't blame them. The circumstances favor that course of action. That means that once this demographic behemoth starts to retire, it will be bad enough that it will put a lot of pressure on a relatively smaller labor pool than has been the case in past generations (and that much has been publicized), but the problem is made much worse because the boomers underinvested in their youth and middle age, holding back economic growth that would've compounded upon itself by the time that they retired. So it isn't just a matter of having to divide up a pie so that each mouth is fed. It's that we baked a pie that was too small!

Unfortunately, I don't think that there really is a politically acceptable way to resolve the matter at this point in time. But it should serve as a lesson with respect to the Law of Unintended Consequences.

[musicman]

I work with many college educated people who can't manage money. Massive credit card bills (more than 10k). So being educated isn't a factor.

IMO all is takes is common sense.

[CDeb]

So, if you buy a house, you are probably going into the big-time negative column for the year?

[TheNiche]

So, if you buy a house, you are probably going into the big-time negative column for the year?

If memory serves, home purchases are counted as investments. I wouldn't be surprised if that was broken out into several different categories of consumption and investment, though. Not to mention that people usually buy a lot of appliances, furniture, and equipment in the same year that they purchase a house.

[RedScare]

So, if you buy a house, you are probably going into the big-time negative column for the year?

Not unless the value of the house drops. If you purchase a $100,000 house, and borrow $80,000 with a $20,000 down payment, the net worth remains zero. As the value of the house increases, or the mortgage is paid off, the net worth increases.

As for Niche's suggestion that Baby Boomers are to blame for negative savings, I might remind him that Baby Boomers only comprise 25% of the population. For the entire country to have negative savings, Boomers needed lots of help from the most prodigious spenders, 20-somethings and 30-somethings (the youngest Boomer is now 42 years old), who are out of the parents' house, and therefore in the process of accumulating. They also earn far less than more experienced 40 and 50-somethings.

This is not to absolve my Boomer brethren from responsibility. Americans of all ages have shown a remarkable ability to ignore reality. The Depression ended less than 70 years ago, but most Americans believe it cannot happen again. They also believe that they will always have a job, and always have an increase in salary, in spite of the fact that job security today is virtually non-existent.

Just goes to show that people DO watch all those commercials on TV.

[CDeb]

....in spite of the fact that job security today is virtually non-existent.

Just goes to show that people DO watch all those commercials on TV.

So then there IS job security in advertising!

[RedScare]

So then there IS job security in advertising!

Only for the owners of the Madison Avenue firms. The workers are fired as soon as they run out of ideas.

[TheNiche]

Not unless the value of the house drops. If you purchase a $100,000 house, and borrow $80,000 with a $20,000 down payment, the net worth remains zero. As the value of the house increases, or the mortgage is paid off, the net worth increases.

As for Niche's suggestion that Baby Boomers are to blame for negative savings, I might remind him that Baby Boomers only comprise 25% of the population. For the entire country to have negative savings, Boomers needed lots of help from the most prodigious spenders, 20-somethings and 30-somethings (the youngest Boomer is now 42 years old), who are out of the parents' house, and therefore in the process of accumulating. They also earn far less than more experienced 40 and 50-somethings.

This is not to absolve my Boomer brethren from responsibility. Americans of all ages have shown a remarkable ability to ignore reality. The Depression ended less than 70 years ago, but most Americans believe it cannot happen again. They also believe that they will always have a job, and always have an increase in salary, in spite of the fact that job security today is virtually non-existent.

Just goes to show that people DO watch all those commercials on TV.

Ahem, I did not state: "Baby Boomers are to blame for negative savings." It is a contributing factor, but certainly only one among many. Gen X and Y have witnessed the same government guarantees and are going to be underinvestors too, but the aging problem (tangential to the topic of the article) is going to be felt as a result of the boomer demographic group in combination with this and other matters.

I would ask that you not put words in my mouth. Thank you.

[Heights2Bastrop]

I heard this report today. The point was also made that the data may be flawed because certain investments were not counted as savings, like property, or even 401Ks. Not sure of the validity of the news, but it sounded plausible.

[musicman]

I heard this report today. The point was also made that the data may be flawed because certain investments were not counted as savings, like property, or even 401Ks. Not sure of the validity of the news, but it sounded plausible.

they were counting savings as money you put aside. many do invest everything in their house in the hopes of a big return .....someday.

[nmainguy]

I heard this report today. The point was also made that the data may be flawed because certain investments were not counted as savings, like property, or even 401Ks. Not sure of the validity of the news, but it sounded plausible.

Many economists don't count property as savings as they are volatile in their eyes but don't recognize traditional savings are equally as volatile. You and I are old enough to remember the storys our parents told us about the great depression so we know better. If nothing else was drilled into our heads by our grandparents and parents was the enduring value of land. Now days that sounds quaint to those who want the quick dollar. But the quick dollar is fleeting. I took the advice of my parents and grandparents and invested in real estate in the 70's-mainly in the Heights. Now I am in my 50's and looking to cash out. All of my properties are free and clear and 60% are worth 3 times what I payed for; another 25% are worth more than 4 times what I payed. Now I realize I'm the exception to the rule but at least I had a goal and have reached it-just as I suspect you have as well with your Bastrop lifestyle ...maybe it has something to do with the water we drank growing up in the Heights??? HeHe.....

In any event, it would behove everyone to think about the future. You won't be in your 20's forever.

[Parrothead]

I agree with points made by both Niche and Red, but this "Gen X"-er family is learning from others' mistakes.

TJ, right on--keeping up with the Joneses will put you in the hole. Best to stick with good old-fashioned restraint on the "latest and greatest". Besides, that's what ebay and craigslist is for

[N Judah]

As long as the East Asians keep their savings rates up, we should be okay.

[TJones]

I agree with points made by both Niche and Red, but this "Gen X"-er family is learning from others' mistakes.

TJ, right on--keeping up with the Joneses will put you in the hole. Best to stick with good old-fashioned restraint on the "latest and greatest". Besides, that's what ebay and craigslist is for

I have held off for 2 years from buying a new TV. I really want HD, I have a 36" Sony, that works just fine, and the HD box I have from Time Warner actually works on my Sony. I can tell a huge difference in clarity between the analog stations and the digital stations. So, I am content right now. I am waiting for the new Sony Bravias to drop a bit more, then I will cave. I don't think buying a new TV would put myself in the hole. I just think I don't always need the newest thing out there.

[TheNiche]

As long as the East Asians keep their savings rates up, we should be okay.

Agreed, this is a good short- and medium-term solution. But as east Asia develops and becomes more politically and economically stable, their marginal propensity to consume will increase. Ten or twenty years from now, though, we might have problems rooting from the higher cost of capital.

[lockmat]

You and I are old enough to remember the storys our parents told us about the great depression so we know better. If nothing else was drilled into our heads by our grandparents and parents was the enduring value of land. Now days that sounds quaint to those who want the quick dollar.

Is that still a smart thing to do nmainguy? I'm kinda young, I save, but haven't really heard that land ownership is a great way to invest. I know my dad owns property near Lake Livingston, but he never drilled it into my head to do the same.

[Parrothead]

Funny you should mention that. My parents bought an acre out in Roman Forest back in '71, when it was going to be this huge master-planned community, before the developer went bankrupt. You still can't get to our property today without a four-wheeler or some good hiking shoes (kinda muddy). We've been paying itty bitty bits of tax on it b/c it hasn't been worth a whole lot. Out of the blue, now, we're being asked by a geophysical company if they can check our lots for natural gas! Who knows if it has it, and who knows what it means, but man, that land has been sitting there for years with nothing, not worth a dime, and *poof* in an instant it could be worth a whole lot more than what my parents paid for it.

Doubtful, but never hurts to dream....

The point is, eventually, it will be worth SOMETHING...some people just have to sit longer than others. Land can be a good investment. In fact, right now, the swindlers who sold my parents a ton of land in FL back in the '70s are probably enjoying their rewards. Well, someone is, anyway. They probably put the lake back too

Edited February 2, 2007 by Parrothead

[TheNiche]

Is that still a smart thing to do nmainguy? I'm kinda young, I save, but haven't really heard that land ownership is a great way to invest. I know my dad owns property near Lake Livingston, but he never drilled it into my head to do the same.

General land prices are inflated right now, and a good indication of that is the price of rural land, which typically remains stable over the long term once adjusted for inflation. In Texas, rapid economic growth, upstream energy, foreign investment, and (mostly out-of-state) investors using 1031 exchanges have combined to produce a short-term demand shock that has driven price appreciation. Rural land around Houston has been particularly affected. Check out these stats for Houston and for Texas.

The stats that I provided are generally good indications of typical tracts. For instance, if your dad's tract has waterfront or even creeks running through it that could be dredged out into canals as is being done near Lake Conroe, that sucker could be a very good long term investment. This is especially true if hunting leases can cover the taxes and any other expenses.

Urban land, on the other hand, can be played like the stock market. Some neighborhoods will outperform the others, and some neighborhoods may even experience drastically falling prices. You've just got to have the sense and background to be able to sort them all out. That's the key.

But nmainguy isn't talking about land so much as he is about rental houses. If done right, they can be very lucrative.

[TJones]

I also have land up in Livingston, actually just outside of Kiln,Tx. A small jaunt up 146. Only a few acres. I am waiting for some oil tycoon to come try to lease the land to drill on. A friend of mine just struck it for $5mil by selling the rights. Apparently there is nothing under the land though, it is in Louisiana. Like you Parrot, I pay the itty bitty tax on it. I have only driven out to it once, and like you, I needed a 4wheeler and duckboots to get out there, it is right in the heart of The Big Thicket. I could have sworn I heard Banjos playing.

[houstonmacbro]

Seems like the facts (at least government facts) are in and we are STILL spending more than we earn. In fact it stands to reason that none of us are putting enough money aside not just for the future, but not enough either for a rainy day.

I could be doing better, but actually not doing as bad as some stories I hear. Try to put at least 10 - 15 percent aside into my company's 401 and save another 10 percent into a high yield saving each payday.

How are you doing?

***

Consumer spending, incomes up in December; savings rate worst since 1933

Updated 2/1/2007 11:32 AM ET E-mail | Save | Print | Subscribe to stories like this Subscribe to stories like this

By Martin Crutsinger, Associated Press

WASHINGTON

[houstonmacbro]

I work with many college educated people who can't manage money. Massive credit card bills (more than 10k). So being educated isn't a factor.

IMO all is takes is common sense.

Yup, spend less than you bring in. And save (a little) something each payday. Also get monies taken out before taxes and put in a 401, 457, or IRA ... it's easier than most people think, but we want everything ... now.

[Mark F. Barnes]

I also have land up in Livingston, actually just outside of Kiln,Tx. A small jaunt up 146. Only a few acres. I am waiting for some oil tycoon to come try to lease the land to drill on. A friend of mine just struck it for $5mil by selling the rights. Apparently there is nothing under the land though, it is in Louisiana. Like you Parrot, I pay the itty bitty tax on it. I have only driven out to it once, and like you, I needed a 4wheeler and duckboots to get out there, it is right in the heart of The Big Thicket. I could have sworn I heard Banjos playing.

[houstonmacbro]

As I understand from my real estate class, the majority of mineral rights have been sold off on most properties long ago. You still retain your land's mineral rights?

That's rare.

[TJones]

As I understand from my real estate class, the majority of mineral rights have been sold off on most properties long ago. You still retain your land's mineral rights?

That's rare.

The property was bought just as long ago, it was handed down to me.

BINGO !

[houstonmacbro]

That is so cool. We might have the next T Boone Pickens on our hands here! Just remember your board friends okay!

[musicman]

That is so cool. We might have the next T Boone Pickens on our hands here! Just remember your board friends okay!

He's just one of the Jones'

[Subdude]

Note two topics merged.

[Montrose1100]

I'm guilty of not saving.... atleast since last summer. I figure it would be nice to have 'nice' things while I'm young. I don't want to have kids, can't get married. Might as well live it up while I'm still immature. Soak it all up before my brain is fully developed. I don't plan on living past 45, and seeking some kind of virtue in clubs, playing sports, Traveling, material items & luxuries will fade out as I get older.

Don't worry, I'm not 100% shallow. I'll always have my passion for the english language, photography, art, & architecture.

So instead of saving now so I can have money later, I'd rather have my money now and just save up later.