Why is everyone saying how desperately we need to save money “in this economy”?
"You ask a few different, though not unrelated, questions. Everywhere you turn today, you hear   people talk about how much they need   to save or how important it is to find   a good deal on things ""in this   economy"". They use phrases like ""now   more than ever"" and ""in these   uncertain times"". It seems to be a lot   of doom and gloom. Some of this is marketing spiel.  You may notice that when the economy goes south the number of ads for the cheaper alternatives goes north.  (e.g. hair clippers, discount grocery stores, discount just about anything)  Truth is, we should always be looking for ways to save money on goods and services we purchase.  The question is, what is acceptable to you for your desired lifestyle.  (And, is that desired lifestyle reasonable for your income, age and personal situation.)  Generally speaking, the harder times are the more we find discounted/cheaper alternatives acceptable.   Is there really a good reason that   people should be saving more than   spending right now? How much you are putting away is a personal matter.  I can still remember my dad griping whenever he couldn't save half of his paycheck.  That said, putting away half your paycheck may lead to a rather austere lifestyle.  This, of course, depends on the size of your paycheck and your desired lifestyle.  You could be raking it, living simply and potentially put away more than half your income with relative ease. If you have a stable job, and a decent cash reserve, is it anymore ""dangerous"" to make a large purchase now than it was seven years ago? Who knows?  Honestly, no one.  Predicting the future is a fool's errand.  (If you are interested in reading more on this view point, I suggest The Black Swan.) You mention the correct approach in this question.  Ensure that you have liquid assets (cash or cash equivalents, i.e. money that you can draw on immediately and isn't credit) which covers at least 3-6 months of your necessary expenses (rent/mortgage, bills, car payments, food).  (There is no reason that you couldn't try to increase this to 1 year, especially ""in this economy."") You should also strive to have money available for emergencies that don't necessarily include loss of income.  Of course, make sure you're putting away for retirement, as appropriate for your retirement goals.  After that should come discretionary items, including investing, entertainment, the large purchase you mentioned, etc.   You should never use money that you may need immediately (5-10 years) for investing.  This doesn't necessarily include the large purchase you are contemplating.  For example, if you are considering purchasing a home, the down-payment may be one of the items for which you need money in the ""immediate"" future. Is it really only because of unemployment numbers? This is probably the big one that is the focus of everyone's attention.  That said, the human attention span is limited.  We have a natural need to simplify things.  This is one of the reasons that we tend to focus on a few, hopefully important, things.  However, the unemployment numbers are not that the only thing of concern.  Credit is still pretty hard to come by these days.  The overall economy is still hurting, even if we are technically no longer in a recession.  There are also concerns about U.S. government borrowing, consumer spending, recent trucking numbers, etc.  (It may not be obvious, but trucking is used as a barometer of economic activity.  If there aren't as many trucks carting goods across the country, it probably means that there is less economic activity.)  The headline number these days is unemployment, as most census workers have now been returned to the pool. To answer the overall question, we should always be saving money, in good times or in bad.  Be that by squeezing more value out of our purchases or by putting some money away.  We should always try to reduce our risks, by having an emergency ""cash"" cushion.  We should always be saving for retirement.  Truth be told, it is probably more important to put money away in good times, before the hardships hit." As you point out in your question your risk level is personal.  If you really believe your job is stable there is no more risk.  However the overall evidence is that most jobs are less stable, and if you do lose your job you're likely going to be out of work for a while.  One thing to consider though is that if you have planned on emergency credit in the past, that option is not really viable anymore. "I would add to the other excellent answers that another factor besides just high unemployment numbers is the fear people have regarding the ""financial"" aspects of the country, that is the value of stocks and the value of the dollar.  When the economy is sluggish it means people aren't buying enough, therefore companies aren't making enough, therefore their profits are too low and people start to divest from them, and stock prices drop.  Or even the fear of this happening can induce people to sell off shares.   The point is, people are worried ""in this economy"" because if--due to unemployment, low spending/consumer confidence--the stock market crashes again as it did in 2008/09, that represents a lot of savings lost, e.g. 40-50% of what one was counting on to retire with, particularly if you panic sell at the bottom.  Now suddenly it's as if you had a huge robbery, and you will have to work longer into your retirement years than you'd planned.  Similarly, if, due to monetary policy, the U.S. inflates the dollar, what one saved for retirement may not be sufficient.  (These arguments are true for shorter periods than just one's retirement, but just taking that as an example). So it's not just unemployment that is worrisome ""in this economy"".  This said, I agree with George Marian that one ought to be careful and plan well regardless of the winds of the economy.  I guess for most people (and companies), though, ""in this economy"" means they can't get away with the kind of carelessness they might have during a boom." It's all about risk. In 1990, expressing the idea of the US defaulting on debt payments would result in you being labelled as a crank.  Yet in 2011, the President and Speaker of the House played chicken with the credit of the United States, and have a date to do it again in December 2011. Saving some money for the future is a good idea.  But how much to save is a tough question.  I retired with a small fraction of what the experts said I would need.  Three years later, I can confidently say I did not even need what I had saved. This was called Financial repression by Edward S. Shaw and Ronald I. McKinnon from Stanford (https://en.wikipedia.org/wiki/Financial_repression). Financial repression is the situation, when government is stealing from people, who rely heavily on saving, rather then on spending. Meaning that your saving rates will be a lot worse then inflation rate. Financial markets are artificially hot and interest rates artificially low (average historical interest rate is 10%). This could be a possible predictor state to hyper-inflation.
"Two typical responses to articles/surveys making such claims:  **1. People use other forms of asset for emergency savings because interest rates are low - clearly false.**  **2. People use other forms of saving than a saving account therefore such surveys as the X% can't handle a $500 emergency are wrong on their face - this is false the vast majority use a savings account.**  I've chosen a topic that absolutely annoys the shit out of me every time it comes up, how people save their money. Every time this topic comes up about X% of americans can't come up with $Y dollars in an emergency or have less than $Z in savings someone inevitably chimes in with the linked response. I have *never* seen anyone attempt to source their hand waving response beyond their own anecdote, which is usually a thinly veiled brag about how financially savvy they are with their wealth. Perhaps people who have no assets, or crippling debt don't go out of their way to brag about it...  I could link multiple reddit posts making a similar response, which I address with my own stock response about once every 1-2 months. Instead I've decided to expand with data from several other sources. This is the prototypical good/bad research problem. If you're asserting something, but qualify your statement with, ""I""m sure we'd find...if we looked into..."" then you're doing it wrong. A good researcher or journalist doesn't put bullshit like that in their work because it's their job to actually look for sources of data; data which should exist with multiple government and independent groups. So let's get started (all data as recent as I could find, oldest source is for 2010):  * [Most americans don't invest in the stock market](https://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf)  About 48.8% of americans owned publicly traded stock directly or indirectly, with a much smaller percent (13.8%) owning stock directly -  pages 18 and 16 respectively. It's important to note the predominance of indirect ownership which suggests this is mostly retirement accounts. It's entirely possible people are irresponsible with their emergency savings, but I think it safe to say we should not expect people to *dip into their retirement accounts* for relatively minor emergency expenses. The reason is obvious, even if it covers the expense they now have to make up the shortfall for their retirement savings. This is further supported by the same source:  &gt;""The value of assets held within IRAs and DC plans are among the most significant compo-nents of many families’ balance sheets and are a significant determinant of their future retirement security.""  Ibid (page 20, PDF page 20 of 41)  There is also a break down of holdings by asset type on page 16, PDF page 16 of 41.  * [This data is skewed by the top 10% who keep more of their wealth in different asset types.](http://www2.ucsc.edu/whorulesamerica/power/wealth.html) For a breakdown between the 1st, 10th, and 90th percentiles see **table 3.**  So far it seems pretty hard to maintain a large percent of americans have their wealth stored outside of savings accounts, mattresses aside.  * [Here's my original reply as to the breakdown of americans assets by type and percent holding.](https://imgur.com/a/DsLxB) Note this assumes people *have* assets. [Source for images/data.](https://www.census.gov/people/wealth/data/dtables.html)  Most people use savings accounts, with runner up falling to checking accounts. This will segue into our next topic which is the problem of unbanked/underbanked households.  * [A large number of individuals have no assets; breaking down by asset types assumes people *have* assets in the first place.](https://www.fdic.gov/householdsurvey/)  To quote the FDIC:  &gt;*""Estimates from the 2015 survey indicate that 7.0 percent of households in the United States were unbanked in 2015. This proportion represents approximately 9.0 million households. An additional 19.9 percent of U.S. households (24.5 million) were underbanked, meaning that the household had a checking or savings account but also obtained financial products and services outside of the banking system.""*  That's right there are millions of households *so finance savvy* they don't even have bank accounts! Obviously it's because of low interest rates. Also, most people have a checking account as well as savings account, the percent with ""checking and savings"" was 75.8% while those with ""checking only"" were 22.2% (page 25, PDF page 31 of 88). It's possible in some surveys people keep all their money in checking, but given other data sources, and the original claim this fails to hold up. If the concern was interest rates it makes no sense to keep money in checking which seldom pays interest.  This survey also directly addresses the issue of ""emergency savings"":  &gt; *""Overall, 56.3 percent of households saved for unexpected  expenses or emergencies in the past 12 months.""* (page 37, PDF page 43 of 88)  Furthermore:  &gt;*""Figure 7.2 shows that among all households that saved for  unexpected expenses or emergencies, savings accounts  were the most used savings method followed by checking  accounts:* **more than four in five (84.9 percent) kept savings  in one of these accounts.** *About one in ten (10.5 percent)  households that saved maintained savings in the home, or  with family or friends.""*   Emphasis added.  * [Why don't people have wealth in different asset classes? Well they don't save money.](http://cdn.financialsamurai.com/wp-content/uploads/2014/06/savings-rates-by-wealth-class.png)  This is further supported by the OECD data:  * [Americans ""currency and deposits"" are 13% vs 5.8% for ""securities and other shares"" as % of total financial assets.](https://data.oecd.org/hha/household-financial-assets.htm)  Additionally:  * [Interest earning checking accounts: 44.6% of american households (second image)](https://imgur.com/a/DsLxB)  * [""Among all households that saved for unexpected expenses or emergencies, savings accounts were the most used  savings method followed by checking accounts..."" (page 7, PDF page 13 of 88)](https://www.fdic.gov/householdsurvey/2015/2015report.pdf)  * ~70% saved for an emergency with a savings account vs ~24% who used checking. *Ibid.*  In fairness the FDIC link does state *banked* americans were more likely to hold checking accounts than savings accounts (98% vs ~77% respectively) but that doesn't mean they're earning interest in their checking account. It's also worth noting median transaction account value was for 2013 (this is the federal reserve data) $4100." What is best for everyone is maximizing the effectiveness of the resources at hand.  We are most certainly not doing that, as there is just so much capacity sitting idle right now.  Demand is what we are lacking.  Stimulus creates demand.  Demand puts people to work, it builds companies, it brings ideas to fruition.  Effective limiters can be used to avoid consequences of an overheating economy when that time comes, but we are far away from that point.  Imposing these silly superstitions that somehow someday the U.S. is going to get to a point where we can't pay back our debt is making us lose focus on the fact that real people are suffering today, and that we can do something about it.  Without artificial constraints like congress putting a limit on the debt, **it is impossible for the U.S. government to default.** "Both OP and the author of the newspaper article should have titled this ""When the media take the time to explain the true state of our economy, people are less optimistic about the future."" A simple link to [this](http://research.stlouisfed.org/fred2/series/UMCSENT) graph would show that consumer confidence has rebounded, but dipped during the debt crisis (as it should have) because the media were reminding people how utterly weak our economy is. The fact that average hourly earnings today are exactly where they were in 2008 is a disaster. But to state that Americans perception of the economy is worse is flat wrong. They actually perceive it as improving when in fact it's on extremely shaky ground." "If one takes a slightly more expansive view of the word ""saving"" to include most forms of durable asset accumulation, I think the reason some do and most don't is a matter of a few factors, I will include the three that seem obvious to me: Education Most schools in the US where I live do not offer personal finance courses, and even when they do, there is no opportunity for a student to practice good financial habits in that classroom setting. I think a simple assignment that required students to track every penny that they spend over the period of a few months would help them open their eyes to how much money is spent on trivial things that they don't need. Perhaps this would be more effective in a university setting where the students are usually away from home and therefore more responsible for the spending that occurs on their own behalf. Beyond simple education about personal finances, most people have no clue how the various financial markets work. If they understood, they would not allow inflation to eat away at their savings, but that's a separate topic from why people do not save. Culture Since much of the education above isn't happening, children get their primary financial education from their parents. This means that those who are wealthy teach their children how to be wealthy, and those who are poor pass on their habits to children who often also end up poor. Erroneous ideas about consumption vs. investment and its economic effects also causes some bad policy encouraging people to live beyond their means and use credit unwisely, but if you live in a country where the average person expects to eat out regularly and trade in their automobiles as soon as they experienced their highest rate of depreciation, it can be hard to recognize bad financial behavior for what it is. Collective savings rates reflect a lot of individuals who are emulating each other's bad behavior. Discipline Even when someone is educated about finances, they may not establish good habits of budgeting regularly, tracking spending, and setting financial goals. For me, it helps to be married to someone who has similar financial goals, because we budget monthly and any major purchases (over $100 or so) must be agreed upon at the beginning of the month (with obvious exceptions for emergencies). This eliminates any impulsive spending, which is probably 90% of the battle for me. Some people do not need to account to someone else in order to spend wisely, but everyone should find a system that works for them and helps them to maintain some financial discipline." Can you even answer a simple question? Economics is not game unless you're thinking playing with people lives is a game? Government saving is giving away money? What? Do you even know what saving means?   Also it's not because I don't agree with you that I don't have an open mind. I go with the facts and the facts suggest you're on another planet. Going against the status quo isn't a sign of an open mind. &gt;if you don’t have a lot of money, the presence of a sizable sum in the house or even in the bank means that you’ll be constantly tempted to dip into it.  The psychology behind statements like this are a source of amusement to me. They seem to presuppose that those who have less money are bad with it, kind of a chicken and egg issue that assumes one over the other.  It makes me think that authors, researchers and opiners have likely never felt the degree of financial insecurity that drives behaviors such as the ones being discussed.  If you don't have a lot of money, the possession of a sizable sum presents other problems, such as issues of needs and purchases that have been put off due to a lack of resources while you prioritized for survival. You put off buying the washing machine because your car needed repairs, how else were you going to be able to get to work? You can limp by using a laundromat or doing laundry at your parents' house. But you likely put off all sorts of other needs as well, and now you have to find the best way to allocate a sizable sum that likely isn't going to be enough to address all of the needs you have put off.  While you're trying to decide how to best allocate this resource, don't forget the talking heads that lecture you on the importance of an emergency fund. Disregard for a moment that when cash is such a scarce resource, any unexpectedly dire circumstance which would be best resolved by your having more of it probably constitutes an emergency. "If I understand, you're saying that the cause of the slow recovery is structural. That is, that our economic problems are due to to being unproductive. That's simply wrong. [There is no evidence of that.](http://krugman.blogs.nytimes.com/2012/06/08/the-structural-obsession/)  Moreover, there is not ""plenty of demand"" as you claim. Expected aggregate demand growth isn't what it used to be." "but simple economics also proves that if you have no savings (most millennials do not these days at least in Canada) and you have no income, then you have no entertainment or more importantly no shelter and food. I would understand taking a cashier job instead of store manager job because of the fewer hours and responsibility, but does ""no income"" not mean you go hungry? If that is true, where are they getting their food from?" "Well, first off - yes, every year the younger generation grows up but remember that the older generation also dying off/leaving the market place. Also, what happens if the younger generation can't take up enough debt in order to pay for previous commitments?  Secondly, I think you're confusing the money supply with actual production. The two are pretty much divorced from each other - money doesn't require a ""resource"" per se (at least, not since leaving the gold standard), it just requires that someone is able/willing to take on debt. For example, every time you take a loan out from the bank, you are effectively creating money. This is called bank credit and if you live in a country that uses fractional reserve banking then it makes up a very large part of your money supply (think like up to 95%). When bank's create money, they only create the principle amount (ie. the original loan amount) and not the interest amount as well. This means that someone else needs to take out a loan so that you can repay the amount in interest that you owe on your new loan. This doesn't normally affect you because there are lots of people taking out lots of loans all the time and money is circulating around in the economy. The problem is that eventually the system gets to a stage where people can't really take out loans any more, they just have too much debt, and so you end up with a liquidity crisis like in 2008.   So what I was saying is that either I'm missing something pretty obvious and I've got this wrong or this is exactly how it works and economists like to just ignore it for the benefits that it offers..." Preparations for inflation that is not going to happen anytime soon is preventing much needed currency from being injected into the system.  The deflationary pressures are so strong that less and less currency is being circulated, as people fear for the future.  They save more and spend less, because their neighbor's out of work, and they might be next (if they are lucky enough to still have a job).  That's not to mention that huge mortgage that they bought into, and are now massively underwater with.  With that, they are constantly removing chunks of currency from circulation.  When everyone is taking chunks out, the demand for currency rises, and demand for goods and services dies, creating an ever deepening hole.  So yes, I think the government should be making major purchases, damn the deficit.  Fiber to everyone's home, absolutely massive funding of clean energy research and projects, combat infrastructure decay, etc etc.  Labor and resources are cheap right now, and leaving all these people with stagnating skill sets by the wayside with no options creates an exponential decrease in productivity.  We have the methods to control inflation when and if it rears it head.. high taxation and high interest rates.  Let's burn that bridge when we get there.  The U.S. budget does not work like a household, as alluring as this analogy is.  There is no paying back the deficit, and there will never be a problem paying the interest on a a currency we can make more of at any point.  The real limitation here is inflation, and we have none. "Smartphones? Really?  How about a lack of work and a scarcity of disposable income?  Currently the US unemployment rate is at 4.2%, below the mark for ""full employment"" and *well* below where upwards wage pressure should be forming.  At the same time, the participation rate is also moribund, dithering around the 60% mark.  At this point, there should be so much wage pressure that an argument over minimum wage should be moot, as even the corner McD's should be offering $15 an hour just to get people to notice the help wanted sign, and yet it isn't happening.  Why? Because there are no jobs.  ""But the BLS says there are 6.2 million jobs available!"" you say.  Yes, and they've said so since July.  This is called churn, and it's the same jobs being offered over and over again to people who stay for a month and move on.  The low inflation is due to one thing: Normal, everyday people have no money to spend, there is no real economic growth, there is no wage pressure.  All the money is locked up in financial markets, making more wealth, but producing nothing.  ""But look at all the smartphones that exist today"" that replaced flip phones that replaced wall phones.  Sure, everything is cheaper: It has to be, or else no one could afford it." "It's also not really anything new.   For a several decades, a huge percentage of the population has been essentially living paycheck-to-paycheck, and with essentially zero cash savings to cover emergencies.  It's possible that it is slightly worse now in the sense that -- with the pervasive use of credit &amp; debit cards, etc -- few people deal in cash or change very often ... and so they don't even have the old proverbial ""piggy banks"" (or jars/bottles filled with end-of-day pocket-change) that they can raid for $50 or $100.  *Oh, and THAT really has nothing to do with ""bubbles"".*  ---  EDIT: Plus another thought... just the other day there was an article crowing about how Millennials are ""saving for retirement"" in higher amounts and at earlier ages than prior generations -- if that is true, then a likely corollary would be that they are NOT engaged in plain old ""savings"" at the same rate -- i.e. what money they are ""stashing away"" is all heading to Wall Street, and is difficult to access in an emergency (and if they did access 401k savings, it would likely be as a ""loan"" -- rather than paying the early-withdrawal penalties &amp; taxes)." "There's a lot wrong with your explanation and analogy.  I believe you are trying to refute otherwiseyep but you haven't really.  You have described the ""work"" or the ""step in the money-building process,"" that was happening *before* otherwiseyep's scenario.  otherwiseyep's scenario begins at ""the apple farmer wants to get some meat but the orchard hasn't matured yet,"" implying that apples have in fact been traded for meat in real time.  Secondly, I would much prefer a person build their own explanation and analogy than build onto someone else's while thinking it insightful in any way.  Lastly, you went all Paul Krugman on us and used the word ""costs of production"" which I *think* you mean to be ""work"" but you did not build that analogy.  When you went ""Paul Krugman,"" you jumped a HUGE boat.  Krugman talks about very advanced economics and some of his stuff is political in nature.  At no point did you build any specific analogies to Paul Krugman's many theories.  You so completely lost me with that, I almost went into negative integers.  Edit:  otherwiseyep had been misspelled as otherwiseyes.  Slightly laughable." Because its working so well right now?  Companies will still higher new employees if there is a demand.  Some people might lose their jobs but it will not be something that cripples the economy.  This sky is falling mentality is what keeps us stuck in this pseudo slavery enviornment we live in right now. Besides all of the other answers, I will point out that many people simply don't have enough cash sitting around to buy a home outright.  It would take many years (or even decades) for the average family to accumulate the necessary cash. Also, while you are pinching your pennies for years in an attempt to save up for your dream house, remember that inflation is steadily driving up the cost of goods and services.  A house that costs $200K today could cost $230K in 5 years due to inflation.