Diwate: Savings rate affects lifestyle


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Opinion: Diwate 11/9

Varad Diwate

One of the first things I did after landing in the United States was to open a bank account at a local bank. In a new country, I was ready to experience culture shock. However, I was in for a different kind of shock. It was the interest rate. For smaller amounts in a savings account it was 0.10 percent and 0.01 percent in a checking account. It was a shock because during the recent credit crunch in India, the savings rate had reached 9 percent!

Such a low savings does not obviously encourage savings in banks. That is the reason some say that keeping your money in a mattress is better than keeping it in a bank. It is common knowledge we should save for a rainy day. You never know about your next financial, personal or medical emergency. Yet, the most simple and sensible advice is often ignored. The U.S. Bureau of Economic Analysis says that the personal savings rate was about 3.3 percent. According to a recent survey, 41 percent of Americans have savings of less than $500.

The spending habits of an average American are well-known (read: spending more than earning). Also, there is no dearth of avenues to spend for any economic group. For the fortunate 1 percent, it may the latest phone, car or yacht. Or maybe the latest iPad for a middle-class person.

A spending spree beyond one’s means leaves little on whatever one gets on a paycheck. An easy credit card system makes it even easier for instant gratification. In fact, the “boom” period before the 2008 recession saw a negative savings rate.

The savings issue is bigger than an individual’s habitual streak. It is part of broader economic policies. Just the low interest rate on savings, Americans also have low interest rates on loans. This is supposed to encourage people to take more credit and thereby increase spending. For an average consumer, it brings up another question: Why do you need to save money if you can always borrow it? Ultimately, it feels that economic policies focus only on consumer spending even if the money spent is not actually owned by the consumer.

Let’s consider the saving habits of an average American in contrast to people in other countries. Japan is known for its high savings rate. China is actually funding U.S. finance its deficit. For those who say savings is more of a cultural “habit,” it isn’t. Professor Sheldon Garron of history and East Asian studies at Princeton University says: “Countries like China did not always save a lot. The key was access to savings. A savings model in which banks and post offices accepted small deposits was adopted on the lines of European countries and it helped large number of people to begin saving.” So, it maybe it is more about awareness and access to saving facilities rather than an unwillingness to save.

He further says that household debt and national debt “tend to be fairly separate.” He cites the example of Japan which has a significant national debt in relation to its GDP. Households savings in such countries can help national debt to be “serviced” at a lower cost.

However, individuals and households do get affected by low or high savings they possess. For example, people who want to retire cannot actually do so unless they have sufficient amount of money for retirement. It also means that if you don’t save for your next year in school, it is going to add up on your student debt. And of course, you don’t rack up credit card debt in any sort of emergency, if you have savings.

What can you do so that you have something to fall back on during hard times? Or save for next year’s tuition or maybe grad school. Starting early seems to be the key. Long-term goals require long-term planning. Keep a tab on your student loan and credit card dues. One can also make use of the Financial Counseling Clinic to setup an appointment and discuss credit card issues, budgeting, student loan, home ownership, etc. This service is free as it is sponsored by the Government of Student Body.

It definitely sounds better than putting your money under a mattress to save it.