Personal Finances

Figure 14.11 "U.S. Savings Rate" shows the U.S. savings rate - which measures the percentage of disposable income devoted to savings for the period 1960 to 2010. As you can see, it suffered a steep decline from 1980 to 2005 and remained at this negligible savings rate until it started moving up in 2008. The recent increase in the savings rate, however, is still below the long-term average of 7 percent".

Figure 14.11 U.S. Savings Rate

Now, a widespread tendency on the part of Americans to spend rather than save doesn't account entirely for the downward shift in the savings rate. In late 2005, the Federal Reserve cited at least two other (closely related) factors in the decline of savings:

• An increase in the ratio of stock-market wealth to disposable income
• An increase in the ratio of residential-property wealth to disposable income

Assume, for example, that, in addition to your personal savings, you own some stock and have a mortgage on a home. Both your stock and your home are (supposedly) appreciable assets - their value used to go up over time. (In fact, if you had taken out your mortgage in 2000, by the end of 2005 your home would have appreciated at double the rate of your disposable personal income.) The decline in the personal savings rate during the mid-2000s, suggested the Fed, resulted in part from people's response to "long-lived bull markets in stocks and housing"; in other words, a lot of people had come to rely on the appreciation of such assets as stocks and residential property as "a substitute for the practice of saving out of wage income".