When did Americans' relationship with money break? Why did saving become the enemy?
When the topic of saving money comes up, it seems to have a negative connotation. You've probably noticed that it goes something like this: “I’d love to save, but I just can’t afford to.” Instead of something positive like, “I know how important it is to save for my future, so I’m willing to make some sacrifices.”
We’ve all had that negative voice inside of our head say, “Wow, they drive such an old beat-up car.” In reality though, what’s wrong with driving an old car? We would argue that living within your means is admirable. Many of us not even realizing there's a difference between being rich and wealthy.
Most of us would agree that being financially independent is an incredibly powerful achievement and a dream for most Americans! One huge benefit of saving and living within your means is eventually being able to afford to retire! Yet most people don’t make the decision to invest in their future. According to financial services firm Edward Jones, only 37% of Americans save in an IRA!
(If you don't know what an IRA is, click that link – we've got your back.)
Why Aren't Americans Saving? Their Relationship With Money Is Broken.
It's almost as if saving and living within your means is seen as a weakness or a negative thing. Like making a budget is death sentence, instead of the key to freedom.
Let’s face it, saving money isn’t sexy. Going to the $35 exercise class, now that’s sexy. Buying the latest and greatest iPhone is sexy.
But do these things actually make you happy? We'd venture to say that in the long-run they don’t.
It’s no surprise that “40% of Americans can’t pay a $400 emergency expense.” After all, the average personal savings rate was only 2.8% in April 2018, according to the Federal Reserve Bank of St. Louis. This helps to explain how U.S. household debt reached a new peak of $13.21 trillion in the first quarter of 2018.
But things weren’t always this way.
For many years, Americans actually were able to save their money. In fact, the savings rate following a recession in the 1970’s got as high as 17% in May of 1975.
However, in the past few decades, a shift has taken place – on average, Americans owe more money than they actually have. Easy access to credit and a boom in home values has made borrowing easier than ever, but perhaps this isn't the full story.
What Else Might Be Ruining Your Relationship With Money?
One theory is that conspicuous consumption is spreading with the advent of social media, which only helps to highlight what we don’t have. With Facebook, Instagram and Snapchat, the first images many people see when they wake up are of luxuries they’d only dream of having in real life.
When it seems like everyone else is traveling, buying new things, or always eating at restaurants, it can seem like you're the only person not doing those things. Are these images starting to influence and impact our spending habits? The numbers seem to point in that direction.
Conspicuous consumption is essentially buying things in order to maintain a certain image or social status, or because of social pressure or expectations. These pressures are precisely the wrong reason to purchase something, especially if your ultimate goal is to have a comfortable retirement.
Which would you rather? Own a fancy car and appear as though you are rich just to fit in? Or save on that car and buy something more affordable so that you can add to your savings account and get closer to a comfortable retirement? We think the answer is clear. There is nothing glamorous about owning a Mercedes, if in reality you are broke and living paycheck to paycheck. Ouch.
While painfully obvious, it’s critical to understand that a small increase in your savings rate (e.g. from 3% to 6%) would allow you to save 2x as much money, while not meaningfully changing your standard of living.
We All Do Certain Things To Fit In, So What’s The Big Deal?
In general, there’s nothing wrong with wanting to fit in. After all, trying to fit into a group is a normal social behavior that we begin to exhibit at an early age. However, the big deal is that trying to keep up with the Joneses is causing undue financial hardship on families. Relying on social security or other social safety nets to fund your retirement will not cut it.
If you truly want to pursue financial independence and an eventual retirement, it’s important to realize what is driving you to make poor financial decisions, so that you can fix it.
You Need To Focus On Being Wealthy Instead Of “Rich”.
In order to begin to repair your relationship with money, it’s important to reframe the purpose and role money plays in your life. Rather than focusing on the amount of things that you have or want, you should focus on the things that maximize your happiness.
Begin by taking a hard look at what you have spent money on, and critically assess the sustained happiness that those things have brought you. This will make it easier to cut expenses that are not additive to your life.
Own a huge cable TV package, yet you only watch the same 5 channels? This seems like a great candidate for cutting your expenses! The good news is that learning how to make a budget is simple.
How Do I Know Which Things Truly Make Me More Happy?
Research by Harvard Professor Michael Norton has shown that all things equal, experiences will bring you more happiness than physical products and goods.
Remember that time you were sitting at a table with your family and you couldn’t stop belly laughing? That memory still makes you smile.
The $1,000 new designer handbag you charged to your credit card when you only had $300 in the bank, not so much.
By becoming more aware of the things you spend money on, you’ll start to gain the awareness required to proactively decide which things are worth it. This, in turn, will make it even easier as you begin to cut back and increase your savings rate. We aren't here to tell you not to spend money. We're just here to tell you to spend mindfully.
But, if you can be a little more thoughtful about the way you spend your hard-earned paycheck, you might start to realize that saving and accumulating wealth is actually a lot more fun than you imagined.
After all, having a broken relationship with money hurts more than just your wallet.
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