We have all heard the saying, “a penny saved is a penny earned,” but today, nobody believes it’s true. Recent statistics about spending and saving habits in America tell the story. According to the Huffington Post, three quarters of Americans do not have enough savings to cover six months of expenses, and 76 percent of Americans live paycheck to paycheck, according to a report released by Bankrate.com. The U.S. savings rate of disposable income has dropped from above 8 percent in 1959 to just above 2 percent today.
Young adults in particular seem to lack the drive to save. In 2012, college students from the so-called “millennial generation” spent on average $780 per month on discretionary items, even while 94 percent of college students graduate with student-loan debt. Our generation’s lack of good saving habits will harm our future.
College students are discouraged from saving today for two main reasons. First, government policy has made the return from savings very low. Since the 2008 financial crisis, the Federal Reserve System has kept interest rates extremely low — at about .25 percent — under the theory that this will promote economic growth. Whether or not this theory is correct, one consequence of the policy has been that historically reliable interest income from savings accounts has nearly vanished. When money loses more value to inflation than it gains through interest income, there is very little incentive to save. Unfortunately, college-age students growing up in a time of low interest rates may be less willing to save when interest rates rise.
Culture has also discouraged saving among college-aged students. Millennials are known as the “instant gratification” generation. Many think millennials are unwilling to sacrifice some present value for more future value. Fad phrases, such as “YOLO,” promote ignoring the future and living in the moment. The recent bubble in the housing market advanced the idea that living in a house you can’t afford is just part of the American dream. Many celebrities today flaunt profligate lifestyles. All of this has influenced college students today, suggesting that saving is an overrated habit.
The media also bears some responsibility for our lack of saving. News outlets largely report that consumer spending drives the economy. While spending might give the impression of greater economic activity in the short-term, spending is clearly not a path to improving standards of living. Increases in the standard of living require money being set aside for future productive purposes in lieu of consumption today. Because the media is practically unanimous in the belief that consumer spending drives the economy, it has more or less been accepted as fact.
Without saving, college-aged students are less likely to achieve financial stability later in life. According to a report from the University of Kansas, children who had experience with savings accounts typically made better financial decisions later in life than those who had none. Investment company T. Rowe Price has reported that one’s savings rate is a key part of increasing the probability of a better retirement. Saving may be a major component of happiness. According to a study from Ally Bank, 85 percent of Americans say saving makes them feel good. About 89 percent claim saving makes them feel proud, and 84 percent say saving makes them feel independent. Most significantly, the study also found that higher amounts of savings are correlated with a greater likelihood of feeling very happy.
I am not arguing that savings is an end goal. The purpose of saving is to be able to consume a greater amount in the future. There would be no point to saving if it were simply about accumulating more savings. Similarly, while exercise can boost longevity, nobody spends time running on a treadmill in order to be able to spend more time exercising.
While saving may be more difficult today than it has been in the past, the principle that saving can lead to greater consumption in the future still holds true. A challenge for college-aged students today will be to find creative ways to save and generate income for themselves.
There was once a time when saving was considered a virtue. Benjamin Franklin wrote in his autobiography of the power of habits, including frugality. Each of us has the opportunity to make saving a goal in our own lives. We just have to make the decision to do so.
Oliver Hudson ’14 wishes a penny was still worth what it was worth one hundred years ago. He may be contacted at oliver_hudson@brown.edu.
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