Another view of the "Savings Rate"

The Current 'Depression'

Stagnant wages, the "savings rate" and other non-problems

Excerpt: As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.

Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets--in other words, your gains in overall wealth.

I take a more conservative view than the Wall Street Journal - a view that is basically in line with the government. To "count" an increase of one's home value, is faulty for these reasons: 1.) It is not realized. By this I mean that it is not until one sells said home that there is actual value in real money. 2.) Home increases are community-wide and relative. If I sell a home that has "increased in value" by $ 50,000 ... I still need a place to live. To live in my own community I have to buy another home that has likewise increased in value. In some cases the value of a house increase is really more of a measurement of the loss of purchasing power of yesterday's dollar. 3.) I've been around long enough to see home values decrease. Our first home (our honeymoon house that we purchased in 1975) decreased in value over two years and we sold it at a loss! In summary, a home value that increases can also decrease. It is happening in some areas of the country right now. It is presumptive to regard a home's increase in value as "savings".

I call my saving's rate the amount I invest (401K) and save every year. Frankly there have been years where we have had a negative savings rate - many years! The year I broke my neck we had quite a bit of consumption (spending) from savings.

It is helpful for a couple (or individual) to have a personal "Income Statement" and "Balance Sheet". Tools like Quicken, Moneydance, Microsoft Money, or even Excel, make this task relatively easy.

The "savings rate" is a function of the "Income Statement" ... the wealth increase of 401K / 403B and other retirement investments are a function of the "Balance Sheet".

The prudent man SAVES for the financial uncertainties of tomorrow!