Here's a piece from USA Today that offers some thoughts on why the savings rate in the U.S. is slowing. Their reasons:
- Poor returns.
- Free spending.
- Slow cash flow.
- Borrowing against assets.
Of these, which is the worst? I would have said either spending or borrowing against assets, giving the close nod to spending. USA Today, however, says it's borrowing (but it's related to spending -- people borrow so they can spend). The details:
The biggest reason for our poor savings rate is that people have been borrowing against assets — mainly their homes — to get their hands on spending money. Homeowners have been using home equity — the difference between the value of their home and their mortgage — at an astonishing rate. Fully 80% of mortgage refinancings last year were "cash out." That means borrowers refinanced to a larger loan balance to get their hands on some cash to spend. Last year, consumers pulled a mammoth $243 billion from their home equity. "Previous years pale in comparison," says Frank Nothaft of mortgage giant Freddie Mac.
Am I surprised at this? Not in the least. Our society is awash in the "I gotta have it now" and "I deserve the best" mentalities -- this is just another sign of it.
Unfortunately, these people will have a very difficult time growing their next worth. Instead of borrowing money and spending it like crazy, they should be keeping their home equity (and adding to it by making extra payments) while also spending less than they earn and socking that money away too.
It's not that hard to go from poverty to prosperity, but it does require discipline over a long period of time. And that's one financial quality that's in short supply in today's America.
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