Americans don’t have much set aside for emergencies or retirement, but that doesn’t mean they are undisciplined
The fact that only 47% of Americans can easily come up with $400 in an emergency fits well with the common understanding that Americans are terrible savers. It is consistent with the storyline that Americans spend profligately for today, chasing bigger houses, fancier shoes and nicer cars, instead of steadily and slowly setting aside money for the rainy day that is sure to come.
It’s true that Americans don’t have much set aside for emergencies or retirement. But that doesn’t mean they are simply undisciplined or uninformed about the need to save.
We had a chance to get to know 235 middle and lower-income American households deeply through the U.S. Financial Diaries project, a joint initiative of NYU Wagner’s Financial Access Initiative and the Center for Financial Services Innovation. Our research team analyzed every dollar that came in or out of these families’ homes for a full year — every dollar that was earned, spent, saved, borrowed or given away. The families had at least one working member, but other than that, they were diverse: from urban and rural communities, immigrant and native-born, white, black, Latino and Asian. Incomes ranged from $9,600 to $130,000.
Robert Hill is one of the people who generously gave his time to the research project. Robert, almost 50 during the project, is a very focused saver. He works in technical support at a nonprofit organization in Manhattan, earning a little more than $11 an hour, or about $22,000 a year. To make life interesting, Robert enters sweepstakes and giveaways; he regularly goes to concerts, movies, even the occasional big-ticket event like an all-expenses-paid trip to the
Stanley Cup playoffs, all for free. One afternoon, we met him in an upscale sandwich shop in his office building. He mentioned it was his first time there; he always brings his lunch.
Robert learned disciplined and careful spending from his parents. He keenly remembers his mother making the family’s ends meet on his father’s income from several jobs, while also helping the neighbors and sending money to relatives in worse circumstances. During the year of the U.S. Financial Diaries project, Robert was especially motivated to save: he was sleeping on the couch in his mom’s place in New York City, nursing his wounds from a recent breakup and eager to be in his own place again. The apartment was crowded, and he wanted out, which meant he needed to set aside enough money for the first and last month’s rent — at least a few thousand dollars.
Robert understands the need to save for the long term, but he puts only $25 into his employer-provided retirement account each month. He knows that won’t be enough, but he also knows he’s supposed to save something and that’s what he can do. But his lack of retirement saving for later is hardly because he is overspending now.
Instead, he is contributing toward food and rent and saving for needs coming up soon — renting his own place. For that, he saved several thousand dollars, an impressive share of his annual income. That saving activity won’t show up in surveys about how much “emergency” or retirement savings people have. It won’t show up anywhere at all once Robert finds an apartment because he will hand the money he’s accumulated over to his landlord and his “balance” will go right back down. And then he’ll start saving all over again for a different need.
The big lesson is that even for families that are disciplined and focused savers, saving doesn’t necessarily mean the accumulation of large savings balances. Instead, they are often saving, spending those savings, and then saving again. None of the families in the Financial Diaries were spending recklessly in the present. Still, study participants said they expected to spend 65% of the money in their savings accounts within a year. And they tagged 80% of the money to be spent within three years.
This isn’t because people don’t know any better. We asked Diaries families how much money they thought they should set aside for emergencies, and their answers were consistent with the standard financial advice to stash away a few months’ worth of living expenses. But putting that money aside for long periods of time was unrealistic for them because of the combination of unsteady incomes, stagnant real wages and the rising costs of housing and other basics.
These savers aren’t benefiting much, if at all, from the $400 billion annually in tax subsidies from the federal government that are intended to help people save. Most of the government money goes to higher-income people: 70% of the benefits from the mortgage interest deduction go to the top 20% in the income distribution, and the numbers are similar for tax benefits for retirement and education savings.
Not only are the tax expenditures “upside down,” but because they target long-term investments, they don’t support many struggling families’ most pressing saving challenge. To do more to help, government should provide refundable tax credits (which do more to help lower income families) for emergency savings
The financial services industry can help, too. Many families we met developed workarounds that made their savings strategies more effective. For Robert, it was giving his savings to his mom to hold. He said she was “like Fort Knox,” so he knew he would have to stick to his budget. Another Diaries participant stashed her savings in a credit union an hour away, and cut up her ATM card, so that she would only withdraw for “really, really needs.” A third preferred to save by stocking her pantry rather than filling her bank account. Financial providers can learn from these kinds of hacks. They can adjust their products to make it easier for people to save and harder for them to spend.
Some of the most interesting ideas are coming from financial technology startups. A company called Even, for example, provides a new service that monitors ups and downs in paychecks, offering its customers a “boost” when their pay is low and suggesting saving when pay is high. Digit is a savings app that monitors cash flows and automatically shifts money from a checking account to savings whenever its algorithms suggest the money won’t be missed. In a more traditional mode, the federal government has gotten into this business too, developing the flexible myRA savings product.
Saving is hard, but families are doing much more saving than their bank balances suggest. We should celebrate the hard work many people are doing to save, and design right-side-up tax policies and financial products to maximize the benefits that people achieve from their efforts.
This article was licensed through Dow Jones Direct.
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