The State of Savings in an Age of Excess

A young man walks into Rent-to-Own and buys a 65-inch flat-screen TV for $29.99 a week (though the sticker price is $1,399), despite struggling to pay the bills he already has. After years of toiling at low-wage jobs, another young man finally gets a big break and lands a promising position making upwards of $13 an hour. He’s tired of being poor, but what does he do with his paycheck? Instead of saving, he spends it all on new household goods, personal items, and gifts.

Here is something else I’ve seen. A salesman making over $100,000 and his stay-at-home wife buy a new home for almost $300,000, about the median price for a new house at the close of 2015. They could’ve been more extravagant and bought a home worth upwards of $500,000 in an even ritzier neighborhood nearby. At the same time, they could’ve easily opted for a more modest but still very comfortable $175,000 house (four bedrooms, full basement) in an adjacent subdivision.

But the couple wants to “upgrade their lifestyle” and offer a higher standard of living for their children. They have over $20,000 in consumer debt, and she wants to stay at home with the kids, so when the bottom falls out of the economy during the recession, it puts a huge strain on their marriage, to the point that they seriously question if they made a mistake in marrying each other. The salesman never loses his job, but with a big house and nice vehicles, he and his wife have a certain standard of living to maintain, and they feel the stress.

According to a recent series of reports by the Pew Charitable Trusts, the two kinds of families I’ve mentioned, despite their dramatically different levels of income, are equally likely to experience financial shocks. Also, if they’re like the typical households in the Pew surveys, they have far less in savings than they believe people should have, and there’s a decent chance that when the salesperson’s family hits another financial shock, they’ll actually struggle to make ends meet, despite their high income.

According to the reports, 60 percent of American households experienced a financial shock in the past 12 months. Households with higher incomes were just as likely to suffer a financial shock as those with lower incomes. That’s not surprising, considering how the Pew survey defines “financial shock”: it includes things like a person bringing in less income than expected, a vehicle needing a major repair, and major home or appliance repair or replacement. The most common financial shock was a car repair (30 percent), and about a third of households experienced two or more types of shocks.

What is troubling is that 41 percent of households don’t have even $2,000 in liquid savings, enough to cover a typical household’s largest shock. (Liquid savings refers to those funds that households can access easily and with low cost, like what’s in their savings or checking accounts and cash saved at home.) Moreover, the typical household doesn’t have enough liquid savings to replace one month of income, and more than half of households that experienced a financial shock in the twelve months leading up to the survey reported difficulty making ends meet as a result of the shock.

Four in ten American households don’t have even $2,000 in liquid savings.

As one might expect, the outlook is especially bleak for low-income households. The typical household with less than $25,000 in annual income has enough liquid savings to replace just six days’ worth of earnings, and one-quarter don’t have any liquid savings at all. Among those who experienced a financial shock in the past year, 73 percent said they struggled to make ends meet. Only 32 percent said they would use a credit card in the event of a financial emergency (compared to 49 percent of all Americans), but they were five times more likely than a high-income person to use an alternative service like a payday, auto title, or pawnshop loan (15 percent compared to 4 percent).

By contrast, the typical household with more than $85,000 in income has enough easily accessible savings to replace forty days of household income. That figure still falls considerably short of the at least six months’ earnings in savings that the majority of high-income households believe that “people like them” should have. A quarter of high-income households have less than 13 days’ worth of income in liquid savings. And 35 percent of high-income households said that they struggled to make ends meet in the aftermath of a shock.

In other words, even more affluent households have nowhere near the amount of money they believe they should have in their savings accounts, and many of them still struggle in the event of a financial shock.

The bottom line is that most of us, rich and poor, struggle to save.

But, returning to the two kinds of families I started out with, who gets judged? In my experience, there’s plenty of judgment to go around for the low-income man who strolls into the local Rent-to-Own to buy that huge flat-screen TV. But is there a similar stigma against the more affluent salesperson who opts for the $300,000 home, a choice that means that his family might only have a month’s worth of liquid savings in the event of a job loss? Not among the people I know. Instead, we admire the high-income salesperson for his responsibility and hard work, but judge the low-income man for his “irresponsibility” and “poor work ethic.” Never mind that the low-income man has to work two jobs just to make ends meet, and even then he’s often struggling to make ends meet.

Most of us, rich and poor, struggle to save.

The idea is not to start a class brawl about who’s more financially responsible. Rather, it’s to point out that we’re all living in the same extraordinary age of excess—a time when low-income families think little about buying big-screen TV’s and new furniture, and high-income families think little of dishing out half a million dollars to buy a home. (And don’t forget about the presidential candidates and their allies who are prepared to spend over $1 billion dollars for a race they might not even win!) We’re all drinking from the same cultural fountain, imbibing the same norms, and trying to pay the bills and give our kids the standard of living that we think they deserve—and provide ourselves a little bit of comfort along the way. And in that environment, it’s just hard for many of us to adequately save. (Of course, the low-wage economy isn’t doing less-educated Americans any favors, either.)

The Pew reports offer some general recommendations for policymakers and other leaders interested in encouraging savings, including mechanisms to automate ordinary savings, just like those that apply to retirement savings. I’d also suggest digging into the report For a New Thrift (a report spearheaded by my colleagues at the Institute for American Values), which includes detailed recommendations for stimulating a new thrift culture and countering “anti-thrift institutions” (like payday lenders and Rent-to-Own’s) that cater to low-income neighborhoods.

As the Pew reports make evident, all of us, rich and poor and everybody in between, could benefit from a culture of thrift.