Personal Saving: the portion of personal income that is left over after personal current taxes and outlays
for personal consumption expenditures, nonmortgage interest payments, and net current transfers to government and the rest of the world.
Personal Saving Rate (PSR): the ratio of personal saving to disposable personal income (expressed as a percentage).
Saving money in America made a small comeback during the recession, as it does whenever the economy dips. As people grew more wary of the economy and the short-term future, they decided to save more income in case of possible lay-offs, inflation, etc. In the third quarter of 2008, right before the market collapsed, the rate was just 3.5% of income. Then in the fourth quarter of 2008, it “shot up” to over 5% (there is sarcasm in those quotes).
Now that the economy has supposedly turned around (personally I don’t believe we are out of the dark water yet), people are feeling more optimistic. This is reflected in the decrease in the Personal Saving Rate, from a high of just over 7% in the 2nd quarter of 2009, to less than 5.5% in the fourth quarter of 2010. In fact, the rate has been steadily dropping for the last three quarters because people are spending more money.
Computing the Personal Saving Rate
The Personal Savings Rate is basically [Personal Outlays/(Personal Income-Personal Taxes)].
But what does the Bureau of Economic Analysis include in these categories? The Personal Saving Rate does not account for capital gains in its computation as an income resource. It also does not designate your house as a savings account (and for good reason, as we have seen), as money paid into a mortgage to build up equity does not increase your savings.
Even considering the fact that the above two items are not included into the PSR computation, I still feel that a personal savings rate of 3.5% or even 7% is pathetic. It’s basically Americans trading 40, 50, 60+ hours of their time each week for a few dollars being added to their bank account after all bills are paid. The rate is so low, even at its “peak” during the recession, that I started to suspect that retirement contributions to an IRA or 401(K) could not possibly be included in the percentage. When I looked into the methodology of how the data is collected, I found out that retirement contributions are included; disposable income is what’s left in your paycheck after taxes, not after 401(K) or other retirement contributions. Ouch.
Our Personal Saving Rate for 2010
Calculating our annual Personal Savings Rate is one of my favorite things to do. On Friday I whipped out my calculator, added up our income from all of our tax documents, added up the amount we put into our savings accounts and retirement accounts for 2010, and then plugged everything into an equation. Drum roll please….we managed to put 42.9% of our after-tax income into a variety of short and long term savings last year!
However, some of our savings accounts are open so that we can save money for the short term, which means that we spent some of our saved money. Our largest expenditures for 2010 (all of which were paid for in cash) were our wedding, our honeymoon to Austria, and our new Central A/C and Heater. So how much did we keep for good at the end of the year? We managed to permanently set aside 29.8% of our 2010 income.
Our Personal Saving Rate Goal for 2011
In a year where we had lots of large expenditures, and seeing how the PSR nationally is a mere 5.5%, I should be super excited with our 29.8% of permanent savings. I am…but I have my eyes set on a much larger percentage for 2011: 50%. This will include both our short and long term savings, and it will (hopefully) be permanent. After discussing this with Paul, we have decided that it will definitely be a challenge, but we are certainly up for that!
What was your personal saving rate for last year, and what do you hope to accomplish for this year? Check back on Wednesday when I discuss strategies that can help you in meeting your savings goals.
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