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Q & A

Sunday, October 1, 2000

What are household savings?

Households use their income for purchasing goods and services and for making required payments such as rent/mortgage, interest, and taxes. What's left over is household savings. Savings allows households to make future purchases, travel, leave money to children or charities, buy stocks and other securities, or acquire physical assets such as a new house.

Our economy has been stable for quite some time now. Why is saving for a rainy day all that important?

Personal saving is important for several reasons. First, prosperity goes in cycles. Although our current economic expansion is the longest in history, most economists would agree that—at some point—our economy will continue the path of a business cycle, which means an eventual recession. Second, most people have some flexibility to save and invest during good times. During economic downturns, unemployment rises, which limits many people's ability to save. This is why it is so alarming that the personal savings rate has dropped steadily from 8.7 percent during 1992 to about zero during 2000. This has been a period of steady economic growth and widespread gains in disposable income, yet people are not saving.

Why do Americans need to save if the stock markets and housing prices continue to rise?

Counting on a rising stock or real estate market to substitute for current saving is very risky. First, markets can go down as well as up. History is replete with unexpected crashes in stock and real estate markets. Second, counting on capital gains as a long-term saving plan is actually betting on future profits and incomes that may or may not occur. Unfortunately, as a nation, many people have chosen to forgo personal saving. Instead, they have borrowed money to pay for today's higher spending—spending that may or may not be justified by future prosperity. And, if future corporate profits and personal incomes are disappointing, asset prices will fall. People without savings will not be able to repay the debt they took on earlier to buy their higher standard of living.