Debt Free News

Saving is taking a back seat to spending (part 2)

December 21, 2006

Continued from..

Another big reason we have a negative savings rate currently is the jolt in home pricing that has been taking place over the past 5 years (until recently that is). This gave US spenders the belief that they could rely on equity instead of traditional saving. These are the same people who took out the home equity loans mentioned above.

This is where the overspending comes in. By taking out these home equity loans and refinancing their homes, they bough a bunch of house hold upgrades causing them to actually spend more than they take home in pay.

So, now that we are seeing a true slow down in the real estate market, there will be a lot less spending in the next year or so. Consumers simply will not be able to spend at the same rate they do now that is for sure if you consider the finding we have now. This will hit the economy as well.

On the other hand, you have economists that think the current negative rate over states the concern of consumption against savings. These economists say that the savings rate does not take into consideration issues like money going into bank accounts, 401(k)s and other retirement plans or even mutual funds. What's more, does it measure equity accrued in people's homes? These economists also look to gains in household net worth even though the negative savings rate is taking place as a sign that the normal household is breaking even, and will keep on consuming because of it.
From what we can see in our minor experience here at DebtFree24.com is that the negative savings is still small (0.6% negative) enough that future changes to income or spending predictions may turn out to become positive once again. After all, the saving rate is still teetering on the zero mark. Well, if we stop paying attention to this rate, we could end up in a much worse place. It all depends on how conservative you are on the matter. If you are someone who is struggling with financial issues and debt, you need to think of this article as a wake up call.

So, we may believe that spending is high compared to earnings, but we should also consider total outstanding wealth to consumer spending – if you do look at it – you will see that the spending is low. Keep in mind, if you are reading this debt free article, you are most likely someone who is visiting this site for financial issues you may be having – if so, you are not the outstanding wealth.

The most important thing we can all take away from this debt free article is that we need to be better at understanding our economy.

(475)