The American dream is becoming just a dream for more and more people. As of 2017, over half of all Americans have less than $1000 in their savings account. This includes 39% of people who saved nothing and also 25% who have saved over $10,000. This money saving issue also affects those who are looking to retire. 43% of people aged 50-64 expect to rely on social security once they retire. It's clear that people are saving less than they used to, but why is this?
Debt stops people from saving money
It's extremely easy to borrow money today. For example, federal student loans have no qualifications, which is actually good for improving access to education. However, this also puts many people in a situation that ends up hurting them more than helping. The student loan default rate sits at around 10% and total student loan debt is over $1.5 trillion. Paying off this debt can prevent people from saving in general.
Besides student debt, more than 20% of people have used high-cost borrowing in the last 5 years. This includes high interest payday loans and pawn shops. Credit cards are also very accessible, but come with high APR rates that can build up if not used properly.
Debt borrows against your future income. Anytime you take out debt to fund something, you will pay more in the end and take away from your future income. This lowers your potential to save money.
Wage growth is slow
The economy is growing at a rapid rate, but wages aren't keeping up. Real wages declined 1.3% since the end of 2017 when accounting for inflation. This means that cost of living is outpacing wages. On top of that, Bankrate data shows that over 60% of Americans didn't even get a pay raise last year.
When the growth of wages slows, it makes it harder to save. From 1960 to 1973, income grew at an average rate of 3.2%. This rate fell to 1.5% for the next 20 years afterwards, which led to a slowdown in savings as people needed to spend more on everyday expenses.
Financial Literacy
When we're young, we don't learn the importance of saving or how to do it effectively. As we get older, there's no one to teach us these things. Either you know it or you don't. Those who don't have a hard time. In fact, the adult financial literacy rate in the US is only 57%. On top of that, financial literacy has been falling in recent years.
Financial literacy can affect savings. Some people don't have a budget and spend more than they earn. When they aren't sure where their money is going, it's easy to overspend and affect their savings. This issue relates to many of the other issues causing Americans to save less. Even though Americans are saving less these days, it does not mean everyone has to suffer the same fate. They can start saving today by improving financial literacy and avoiding unnecessary debt. We will be offering more tips for financial wellness in the future.
