In response to last week’s post, I had quite a bit more people reach out with their thoughts and opinions than I typically do. Maybe learning how to spend our money is a universal touchpoint.
Here’s one from my friend, Jason:
“Loved the article today, Jake. It made me feel less guilty about spending on golf.”
Listen, if the only thing my writing accomplishes is to convince my friends to spend more money golfing with me, I’d consider that a huge win.
I also had others reach out with a different perspective:
“Is that Dave Ramsey advice geared toward people who are in debt? Because I do believe that sometimes you can go without. Just because you want something doesn’t mean you should get it. If you are in debt or have other financial issues, there are things you should cut out of your budget even if they make you happy.”
I think this is a valid point.
There does need to be a balance between enjoying life today while still saving responsibly for the future.
So, I wanted to use today’s post as somewhat of a counterweight to last week’s thoughts.
Speaking of Dave Ramsey, personal finance gurus love to spend-shame you into saving every last penny but the truth is there can—and should—be room for both saving and spending, frugality and extravagance, delayed gratification and enjoyment.
Although, if there’s one part of that balancing act we’re better at as a society, it’s definitely the spending, extravagance, and enjoyment side of things. We are a nation of spenders.
According to the Bureau of Economic Analysis, the average household savings rate in the U.S. is currently 3.8%.
The U.S. finds itself far down the list when compared to other countries’ personal savings rates. Countries like South Korea (34%), Mexico (18%), France (18%), and Switzerland (14%) top the list. While only a few countries like Japan (3.4%), Thailand (1.4%), and South Africa (-0.9%) are below the U.S.
As you can see, saving has been on a steady decline over the past handful of decades. The U.S. hasn’t hit a national savings rate of above 10% for a meaningful length of time since 1985. Outside of the Covid spike, the average savings rate has rarely jumped beyond 6% this century.
Is a 3.8% savings rate good enough?
To be frank, no. At least not for most people.
To use a broad example, let’s say you make $100,000 per year and spend $50,000. If you were to save $3,800 (3.8%) of your income each year and invest that money into a portfolio earning 10% annually, you’d end up with around $620,000 after 30 years.
As a very general rule of thumb, to be able to retire comfortably you’ll want to accumulate enough assets to cover around 25 to 30 times your annual spending. In this scenario, that number would be $1,500,000 ($50,000 x 30).
At a 3.8% savings rate, the person in this example would still be nearly a million dollars away from that target retirement number. And that’s not even accounting for inflation.
I see so much financial content out there with headlines like:
“Here are the 5 best stocks you have to add to your Robinhood account THIS INSTANT.”
“Buy this course to find out how I house-hacked my way to a $1 million net worth in my 20s!”
“Here is the one credit card people don’t want you to know about that can help pay for your dream European vacation.”
These types of headlines are for clicks. People don’t need more exposure to cryptocurrency or meme stocks.
Far more people should be focusing their attention on how much they spend, how much they’re saving, and how to intentionally manage a budget.
Every increase in spending negatively affects your finances twofold:
- it decreases the amount of money you have left over to save each month
- it increases the amount of money you’ll need to replace when you slow down or stop working
This concept also works in reverse. The more you save the less you’ll spend, and the less you spend the smaller nest egg you’ll need to live off of in retirement.
What is an ideal savings rate?
How much you should save depends heavily on how much you spend and your own personal situation, but to use another general rule, saving anywhere from 15% to 20% of your total gross income is a healthy goal.
And I get it, saving is one of those things that’s far easier said than done. However, being able to set aside money for your future, regardless of external economic conditions, is perhaps the most important financial skill you can possess.
If there is one thing I’m confident about, it’s that a 3.8% savings rate will not be sufficient for most people to reach their financial goals.
Thanks for reading!
Jake Elm, CFP® is a financial advisor at Dentist Advisors. Jake a graduate of Utah Valley University’s nationally ranked Personal Financial Planning program. As a financial advisor at Dentist Advisors, he provides dentists with fiduciary guidance related to investments, debt, savings, taxes, and insurance. Learn more about Jake.</em