Spending vs. Saving: Do you have more money than you know what to do with?
For many people the answer is probably no. So why did US consumers spend more and save less in December?
First, it’s not completely surprising that people spent more money in December than November. Personal income levels rose in December, tax reform was passed in December and people tend to spend more around the holidays. However, what is surprising is the fact that the US personal savings rate dropped to a 12 year low.
The US personal savings rate, which is the amount of money US consumers save as a percentage of their disposable income, was 2.5% in December. This means that if you had $100 disposable income in December, you spent $97.50 and only saved $2.50. This is the lowest level the personal savings rate has been in 12 years. As comparison, in 2015 the personal savings rate was over 9%. Since that time, the personal savings rate has generally declined, and it’s closer to the historic low of 1.9% than the historic high of 17%.
Why aren’t people saving more?
This is a difficult question to answer, but it’s probably a combination of environment and personal situation. The economic environment seems to be heading in a positive direction. Low unemployment, tax reform and a robust stock market are signs the economy may prosper in 2018. For some, this may give them the false sense that they will continue to earn more money, so they can spend today and save later. For others, it may not be about wanting to spend more money today. It may just be that they don’t know how to save or invest today.
So why should you care?
It’s pretty simple. The sooner you start saving and investing your money, the more potential money you can make. In fancy finance terms this is called the Time Value of Money; the underlying principle is that a dollar in hand today can be invested and turned into more money in the future. For example, if you saved $1000 today and made a 5% return for the next 5yrs, you would have $1275 in 5yrs. If you waited 2yrs to save that same $1000 and made 5% for 3yrs, you would only have $1150 at the end. In other words, if you want to maximize the amount of money you can earn, you should start saving and investing today.
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Appendix: Want the December numbers? Keep reading….
Every month the US Bureau of Economic Analysis, an agency of the US Department of Commerce, provides the data on personal income, spending and savings. Here are the highlights:
In December, personal income rose 0.4%. Personal income is the amount of money you earn before taxes from all of your sources of income. For example, the salary from your job, rental property income and stock dividends are all sources of income. On average, people earned more money in December. Disposable income also rose 0.3%. Disposable income is the amount of money you actually have to spend or save after you pay taxes on your personal income. On average, people had more money to spend or save in December.
Consumers spent more and saved less.
US consumers spent 0.4% more in December than they did in November, according to the Personal Consumption Expenditure or PCE. The PCE measures how much consumers spend on goods and services, such as buying cars, groceries, clothes, and electricity. However, consumers saved less in December. The US personal savings rate was only 2.5%, which is the lowest level it’s been in 12 years. The US personal savings rate is the amount of money a US consumer saves as a percentage of his or her disposable income. In other words, if you had $100 disposable income in December, you spent $97.50 and only saved $2.50.