Personal Savings Epidemic

Malcom Gladwell’s book Tipping Point argues that a minor event can create a dramatic change. Gladwell tells of a child coming to school with the measles. Within a few days every other student has caught the virus and is sick. Within a week they are all better and will never have the virus again. One child with measles can possibly affect hundreds of lives.

One of the things we can do with Everyone Can Build Wealth is help create a savings epidemic. Hopefully, one that lasts generations.

Each generation of Americans has typically had more than the previous. Generation Y immediately wants everything our parents have after 30 years. We’ve spent the first decade of our adult life accumulating things at a pace never before seen in the United States.
For most of the last decade the personal savings rate in the United States bordered on zero. From 2004-2007 it was a rounding error away from zero. Most of us were putting money into our 401k or other savings vehicle. However, most of us were treating our homes like an ATM. We’d refinance and withdraw cash at a rate faster, or as fast, as we saved.

Beginning in 2007, Americans started saving again. We could no longer withdraw cash from our homes and started to understand the difference between needs and wants. We stopped shopping on Fifth Avenue and started shopping at WalMart. WalMart actually experienced revenue growth during the fourth quarter of 2008 and through 2009, while most retailers reported reduced sales and profit.

A return to big box retailers over the specialty stores is just one area we started saving. Here are some of my favorite savings examples from the last 18 months.

1. We’ve got several friends who have gone back to using their wood burning stoves for heat.
2. Game nights and potluck are replacing eating out with friends.
3. Cable TV is getting shut off or at least scaled back.
4. Gas guzzling SUVs are being replaced by minivans and other more economical vehicles.
5. Home phones are being turned off since we’ve all got cell phones. I haven’t won this debate with Kerri yet, but I’m working on it.
6. The library is replacing the book store.
7. Vacations are getting smaller and being paid for in cash.

Reduced consumer spending will keep the economy from quickly breaking out of the slump. Slow recovery is probably best for our long-term financial health. We have become extremely dependant on imports, debt, and consumption in the last 20 years. A slow recovery is far more likely to permanently change behavior toward saving and build a stronger economic engine. Even in 2009 we only saved about 5-percent, so we still have a long way to go to save like other countries. Chinese citizens save nearly 30-percent of their income.

The “Great Recession”, as many pundits have dubbed it, is hardly one of Gladwell’s minor events. In the grand scheme of things, it will be smaller than we see it today. This recession has caused a tipping point in American saving. The change toward saving in our society hasn’t reached epidemic proportions yet, but it can. Let’s spread the virus!