Saving money is a good idea. It's like an all-purpose insurance policy, said Bill Emmons, lead economist with the Center for Financial Stability at the Federal Reserve Bank of St. Louis. Savings can provide a buffer against all sorts of disasters, whether your health fails or you drop out of college or you lose your job.
But people don't save enough. The personal savings rate in the United States, as measured by the Bureau of Economic Analysis, was 3.2% as of May, close to an all-time low and far from the the peak of 17% reached in 1975. The all-purpose insurance policy is shrinking.
The Bureau of Economic Analysis doesn't measure saving directly. It takes income and subtracts spending to get the savings rate. It also gets revised a lot, Emmons said, so take the latest numbers with a grain of salt.
Either way, the downward trend in saving is clear. This is not necessarily the worst thing for the economy. The savings rate is highest in recessions, when people aren't confident enough to spend big. Times are good, so people are making use of their money, Emmons said. But what's good for the economy isn't necessarily good for an individual.
The savings rate generally hovered around 10% back in the 1960s. There are many theories about why people are undersaving now, said Katherine Milkman, associate professor of operations, information and decisions at The Wharton School at the University of Pennsylvania. One reason could be people just don't have anything to save.
But Milkman, who is co-director of the Behavior Change for Good Initiative, a scientific effort to promote good habits in a variety of areas, including saving, focuses on the behavioral reasons. One of the biggest reasons people don't save is they fail to appreciate future gains.
"People tend to discount the future very heavily relative to the present," Milkman said.
That means we prefer the instant gratification a shiny car or fancy night out to the delayed benefit of a stable retirement. (There are some easy ways to beef up your retirement funds while we're on the topic.)
Personal finance writers throw around different (always round) percentages. The 50-30-20 budget suggests you set aside 20% of your income. But how much you should save is a personal decision depending on factors like how much you have, how much you need to maintain your standard of living in retirement and when you plan to retire, if ever.
"It's not zero," Milkman said. "That is very clear, and it's a lot more than most people are putting aside."
Your savings rate depends on your goals. If you want to retire early and lounge the rest of your life, you might want to put aside as much as half your income. If you don't make much, you might want to just establish an emergency fund with whatever you have left over each month. The point is to think about the future.
"I would hope we can help consumers to think more deliberately or look forward and think about their goals," Emmons said. "Are we trying to save for the next recession or the big purchase or for our kids' college?"
Luckily, some really smart people are trying to figure out how to get people to save more. Behavioral economists Shlomo Benartzi and Nobel Prize winner Richard Thaler's "Save More Tomorrow" program encourages companies to offer retirement plans that increase savings rates as workers get raises. They found the program increased savings rates from 3.5% to 13.6%.
Research from Brigitte Madrian and Dennis Shea shows people are much more likely to participate in retirement savings accounts when they're enrolled by default. Milkman's research has shown that people tend to make more future-facing decisions like saving more money or joining a gym during key moments in their lives, such as after a New Year, a promotion or a birthday.
"That's a good time to get people's attention and get them to make good decisions about things like savings, when they're already thinking about self-improvement," Milkman said.
People are particularly prone to nudges to save more after their birthday, Milkman has found.
"Birthdays are motivating moments when we're trying to save more," she said.
Emmons believes the key to saving more may be to encourage people to spend less. But the motivation to spend is strong, and there are many powerful interests, (pretty much the entire economic system), pushing us to borrow and spend, he said.
"There's a smaller and less powerful set of interests encouraging people to save," Emmons said.
Do you want to start saving more? Not sure where to begin? Start with these 25 tips.
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