Issue 132 Why don't we save money July 31, 2013

I take inspiration for this Issue from "Pacific Standard" March/April 2013 Issue. Article: Why Americans Don't Save-and What We Can Do About It." Well, why the heck don't we like to save our money?

I like to Borrow: The Federal Reserve has analyzed this trend and believes the availability of credit "can explain about 90 percent of the long decline in American savings." In other words, they believe that because it is easier to just borrow money that people see it as an easier way to get the cash they want and thus buy what they want sooner. Saving for a new car does not mean you can get that new car immediately and thus cannot not get that instant gratification. I however, still prefer to save as at least I won't owe anyone anything and I can use that left over saving for more important things like retirement (yea I'm only 24, but I'm already thinking about what I have to do to get there).

Helping the wrong people: Apparently we spend $130 billion each year via America's tax code to encourage savings for the future. But almost all of it (according to the article) ends up in the hands of the rich who were going to save money any way and did not need help in the first place. According to Pew Charitable Trusts "the highest income quintile receives 70 percent of the benefits from these tax incentives." "The lowest income quintile receives only 0.2 percent." It kind of makes you question the point of the federal tax codes rules and exceptions doesn't it?

Living off the grid: About 30% of Americans have no savings accounts and about 8% have no bank account at all. Apparently, when there is no bank in the picture it makes it harder to accumulate wealth. Part of the problem is that banks don't make it easy to get an account partly due to "minimum balance requirements" and "onerous" fees which drive them away. As a result these people turn to payday loans, check cashing services and money orders "whose high cost further erode wealth and potential savings." But for once, our neighbors in Europe have an idea worth emulating. They have special banking systems for these "small depositors" which usually take the form of post office banks which apparently boost savings rates in the neighborhood by "10 percent." Perhaps this is something that can not only help the Post office get back on its feet, but make it more useful and flexible for the 21st century.

We are selfish: That is right, one of the reasons we do not save is because we do not care about our future selves. According to the article (who quoted neurologists) that when we think of our future selves, we look and feel about them as if they were a stranger. As such, we value immediate gain over our future selves. Some have tried to mitigate this issue by showing people what they are to look like in the future (digital versions of course) and as a result of that new knowledge actually saved more toward the future. So start thinking about your eventual crinkly, shrunken selves.

Stop making it optional: Well apparently the more rational of us do not have to worry about retirement as we are probably already doing so (yes I've got a 401(k) and stocks along with bonds). But regular people procrastinate (this is according to the article). They wait till the last minute to start saving. Pensions are going bye bye, and Social security is no longer enough (especially as it is predicted to collapse within my life time). However, while people have access to 401(k)'s and similar, they do not use them because of how they procrastinate. So the article suggests that rather than making them optional to join, the companies and businesses make them optional to leave. Basically you are forced to join with a given rate, but you give these people the option to "opt out or adjust the rate." This apparently causes these people in general to "stay the course" and thus have an actual savings. Aka, we need a push and a shove to actually save.

Conclusion: What I got from this is that people are terrible at saving money and psychologically we are predisposed to not worry about the situation until it is too late. Making people opt out is a good idea as private firms can do this, as working for them it becomes a stipulation for employment. Well all I can say is I agree with pretty much every thing and the ideas to get people to save are sound (at least from my perspective). Hopefully you are thinking about your future self like I am.