5 Reasons Why People Save Less Today

Why do people save less than they did 20, 30, or 40 years ago? There appear to be five simple reasons that answer that question.

1. Immediate Gratification – Americans today want things right now. The idea of giving up something today for future gain is becoming more challenging than ever. The media bombards viewers every day with messages that make many believe they deserve things they don’t.
2. Education – Many people simply have not had access to financial education that conveys the importance of saving for their future. According to the U.S. Bureau of Economic Analysis and Trading Economics, the personal savings rates in America have significantly declined over time. In 1959, the U.S. personal savings rate was just over 8 percent and as of July 2014 is now 5.3 percent. (Source: Trading Economics & U.S. Bureau of Economic Analysis)
3. Sense of Urgency – Another common belief is that one can put saving off until later in life. This is a huge mistake. Contrary to popular belief, most of the growth over time in a portfolio does not come from savings, but from dividends, interest, and capital gains. It’s compounding, baby!
4. Too Much Debt – This can be a killer. It’s one thing to have a home mortgage or student loan, but having credit card debt is usually preventable.
According to the Federal Reserve numbers, the average indebted household has $15,252 in credit card debt. High interest credit card debt is one of the single worst things you can have when trying to build a nest egg. For example, paying 17 percent APR on a credit card is literally throwing away money.
Investors can’t even build an aggressive portfolio that would outpace an APR of 17 percent! The long term returns of the U.S. market have averaged around 10% per year (before fees and taxes) over the past 80 years.
5. Bad Habits – Yes, saving is a habit. If investors get in the habit of putting a certain percentage away into to savings or your company sponsored retirement plan every month, then it makes things much easier. If one puts money into a Traditional 401k or IRA they get a dollar for dollar tax deduction and tax deferred growth!
As an example, those who make $50,000 per year and contribute the maximum into their Traditional IRA for 2014 (which is $5,500 under the age of 50) lower their adjusted gross income to $44,500. However, those who decided to spend the money instead of saving would have been taxed at the 25% marginal tax rate for federal taxes and another 8% state income tax (in California).
By simply saving into an IRA, one saved $1,815 in taxes and let their money grow tax-deferred in a retirement account. While they’d eventually pay tax upon withdrawal, you benefit from tax-free growth.