Americans are saving roughly 4% to 5% of their income in a typical month, according to new numbers from the Commerce Department. Sounds like a cause for celebration, right? Not for the economists in Washington.
Politicos are afraid of what’s called “the paradox of thrift.” In the short run, saving money even as incomes rise incrementally actually causes the economy to grow more slowly than it would if we were all shopaholics.
During the bubble years, Americans were spending more than they made. At the peak of it, we spent was $1.01 or $1.02 for every dollar of income.
Then we reached the point back five years ago when the average American had debt equal to $1.36 of their income. Historically, that number was somewhere around 60 some odd cents. That kind of living puts you in a position with no possibility of getting ahead.
Now we’re reversing that trend. But is saving 4% to 5% enough? Not really. It needs to be more like 10% for long-term comfort in retirement.
As we continue to save rather than spend, we are creating future prosperity by saving today and getting our financial picture in order and living a different life.
But forget about the money side of it for a minute. Let’s talk about the anxiety and psychological angle. When I get a call from somebody who faced mountain of debt and they’ve worked it down to a molehill, you hear the joy coming out of them.
Give yourself that power back. When you owe in a capitalist system, you’re weak. When you have, you’re strong.