To understand why Americans save so little, we should look at what savings are for and what the alternatives to saving are. Put simply: savings are for future expenses. Alternatives to saving would be other ways to pay for future expenses.
We save because we anticipate a mismatch between future expenses and the resources to pay for them. For example:
- Retirement
- Big Ticket Items
- Financial Shocks
- Our children's education
Last post documented how the improved economic circumstances of older Americans has reduced the incentive to save for retirement. This time I'll focus on one kind of Big Ticket Item: our homes.
Let’s keep it simple. In the olden days, substantial down payments were required to buy a home. Rule of thumb was 20% - imagine!* Nowadays, the average down payment amount for first time buyers ranges between 5 and 10 percent. Sure, homes are more expensive now but in these post-bubble years, the median home value to income ratio is just 15% higher than it was in 1981. More important, mortgage payments are smaller relative to income:
https://www.realestateconsulting.com/a-picture-more-misleading-than-a-thousand-words/
Financing a home is basically an alternative to saving to buy a home. Thanks to historically low interest rates, mortgages are cheaper than ever. Granted, not all Americans own homes, but most of us will buy homes eventually. And we don't have to save as much to do so.
One more reason why we save less than we used to.
Next: Saving for financial shocks and our kids' education.
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* As with homes, so with cars. Average new car down payments are 10%, compared to the old standard of 20%. And cars have gotten cheaper compared to incomes.