Half of Americans don't have $2,000

[Storm]

http://money.cnn.com/2011/05/24/news/ec ... htm?hpt=T2

What I found interesting was the difference between different countries rate of savings.  It seems that Canadians and the Netherlands have one of the higher rates of savings.  US is close to the bottom of the heap.

I would guess that there is a direct correlation between countries that have an unregulated credit market (payday loans, high-interest credit cards, no-doc mortgages) and low savings rates.

[Pkg Man]

http://money.cnn.com/2011/05/24/news/ec ... htm?hpt=T2

What I found interesting was the difference between different countries rate of savings.  It seems that Canadians and the Netherlands have one of the higher rates of savings.  US is close to the bottom of the heap.

I would guess that there is a direct correlation between countries that have an unregulated credit market (payday loans, high-interest credit cards, no-doc mortgages) and low savings rates.

Perhaps. Although I don't think there is any causation.

[smurff]

http://money.cnn.com/2011/05/24/news/ec ... htm?hpt=T2
What I found interesting was the difference between different countries rate of savings.  It seems that Canadians and the Netherlands have one of the higher rates of savings.  US is close to the bottom of the heap.

I would guess that there is a direct correlation between countries that have an unregulated credit market (payday loans, high-interest credit cards, no-doc mortgages) and low savings rates.

I wish these surveys would compare apples to apples and not apples to bananas.  It's never quite described what assets the surveryors/researchers  count as "savings."  Moreover, the tax systems are different in the countries usually under comparison, making some forms of savings more favorable and hence more likely than others.  For example, for generations American families have tended to save by buying their residences, upgrading, and paying them off over time, because of tax policy, in ways that residents in other nations would not benefit from. 

That the bubble broke and real estate prices collapsed in most regions of the USA may have temporarily changed the tendency to save this way, but it hasn't eliminated it since the tax laws are still the same as before:  Expenses of home ownership--particularly mortgage interest and real estate taxes--are usually the largest deductions that Americans take against their taxable income.  And they get tax credits for upgrading to energy-efficient renovations.  Don't forget, a property that has been held at least 2 years can be sold and the equity kept tax-free, up to $250K to $500K, depending on marital status. 

Americans, Canadians, and Europeans exist under different laws; for example in the USA, saving by putting cash away is discouraged by our system in a variety of ways.  Laws about who can and cannot contribute to IRAs exclude many ordinary (non-rich) people from saving this way, for example.  And the federal government has been gradually allowing corporations to rob American employees of their pension savings since the 1980s.  Again, I'm not sure whether these surveys count old-fashioned company-sponsored retirement benefits (part of the workers' total compensation),  Social Security contributions (this one source alone is a whopping 15% of income for low and middle income earners), home equity, certain collectibles (some gold coins, for example, are classified as collectibles) purchased for financial appreciation as well as visual affection, and/or other assets as "savings."

I've observed that many such articles nag and blame Americans for being lax, lazy, profligate, and wastrel with their savings compared to their counterparts in other nations.  Not true.  People make stupid financial mistakes all over the world.  Human nature is the same whether the humans are in Amsterdam, Toronto, or  Chicago. The incentives those humans deal with, however, differ from place to place.  And humans know it is a good idea to put away something of value for the future, whether that "something" be cash, investments, speculations, stockpiles, or outright purchase of physical assets.

[AdamA]

Perhaps. Although I don't think there is any causation.

Really?  Why not?

[Pkg Man]

Perhaps. Although I don't think there is any causation.

Really?  Why not?

Well, if there was not a demand for things such as payday loans then they would not exist.  It is not the supply of the services that makes people save less money; rather, people who don't save money create a demand for payday loans, and the supply follows to satisfy that demand.

There is no doubt that some people make poor choices.  But I don't think banning a mutual exchange between two parties will improve the situation.  

[moda0306]

Pkg Man,

I agree with you 90%... except I think the credit, consumerism machine tries to drum up false demand.  I'm not saying that means we should ban credit cards or maybe even not regulate them much, but simply that I think this demand wouldn't be there if the consumerism marketing machine wasn't convincing people that everyone deserves a laptop, cell phone, newish car, flat TV, etc.

That said, treating people like children by blaming credit card companies and advertisers is ridiculous.

[doodle]

Deleted

[Lone Wolf]

Well, this is unfortunate.  I had hopes that people would have focused on rebuilding their savings a bit more after 2008.  (smurff, your points on home equity are astute and well-taken, though.)

Anyhow, as a sort of side issue, I wonder if some people don't understand the options they have available to them to raise cash.  If you absolutely, positively have to raise cash, you can:

• Use your savings (if any)
• Take out a loan against your 401(k) (if any)
• Dramatically scale back your spending
• Borrow from friends or family
• Carry a balance on your credit card
• Get a new credit card
• Take out a reverse mortgage
• Open a HELOC
• Sell or pawn items (such as jewelry or furniture)

Could it really be that 50% of all Americans have no savings, no 401(k), no non-essential spending, no friends or family willing to lend them money, no spare $2000 credit card limit space, no credit with which to get another card, no home equity, and nothing to sell to eBay or a pawn shop?  I'm not saying it's impossible, just kind of hard for me to understand how all of those options could be exhausted.  (Note that I think many of these options are horrible but this is a thought experiment, after all.)

Even the idea that fewer than 50% of people don't have $2000 in savings OR $4000 in a 401(k) to borrow against is alarming.

[moda0306]

II am all for personal responsibility but it is really hard to save money for the average person with no financial education (it isn't taught in school) when everywhere you turn someone is telling you that you NEED to have something.

Maybe "hard" is the wrong word, but whether their fault, their parents' fault, "society's" fault, or the bankster's fault, we have way too many undereducated people out there whose only true ability to buy the things they do is to work in the future and pay of debt at exhorbitant rates.

I am inclined, since I have no kids, to maybe volunteer some time for not-for-profit credit counseling.  I really don't care whose fault it is... it's painful to see people go through life so painfully uneducated about personal finance, much less the macroeconomic risks they run with poorly diversified portfolios.

[Storm]

Perhaps. Although I don't think there is any causation.

Really?  Why not?

Well, if there was not a demand for things such as payday loans then they would not exist.  It is not the supply of the services that makes people save less money; rather, people who don't save money create a demand for payday loans, and the supply follows to satisfy that demand.

There is no doubt that people who are relatively less educated make poor choices.  But I don't think banning a mutual exchange between two parties will improve the situation.  

Demand or not, most civilized countries consider a short-term loan with 400% interest rate "loan sharking" and it is illegal.  Only in the US is it allowed.  Sure, in the end you have to put the responsibility on each individual for their own financial destiny, but it's like opening up a "Liquor, Crack Cocaine, and Guns" shop, then wondering why everyone in the neighborhood is drunk, cracked out, and there are a lot of gunshot victims.  Some people are stupid and shouldn't be allowed to commit financial suicide.

I think our laws that allow "loose" credit are a product of the heavy lobbying the credit industry does to our government, and the price has been enormous.  We've spent $trillions bailing out banks that lent money on no-doc loans to people that couldn't afford them.  I'd much rather not offer people the opportunity to commit financial suicide if we can.

The interest-only home mortgage has 2 victims - the idiot who signed for it, and the American public who must bail out the bank when it defaults.  Meanwhile the bankers are laughing all the way to their 8 digit annual bonuses...

[Storm]

I wish these surveys would compare apples to apples and not apples to bananas.  It's never quite described what assets the surveryors/researchers  count as "savings."  Moreover, the tax systems are different in the countries usually under comparison, making some forms of savings more favorable and hence more likely than others.  For example, for generations American families have tended to save by buying their residences, upgrading, and paying them off over time, because of tax policy, in ways that residents in other nations would not benefit from.

Smurff, I see your point, in that a lot of Americans use their home equity as a savings account and might not see the need for cash, but I would argue that this is wrong.  With no emergency fund, if you lose your job, you will fall behind on mortgage payments and lose your house, including all equity you once had.

Some people say "I keep credit cards and home equity credit lines around for emergency purposes."  Again, I think this is wrong, because in a time of financial hardship, credit card companies and banks can and will change the terms of or revoke credit at a moments notice.  You cannot depend on credit availability in a hardship because in the end the creditors need to look out for their own best interests, as it should be.

The other point I would make is that anyone that is unable to save a $2,000 emergency fund is living beyond their means.  This means that every single dollar is spent and you've probably had to tap into your credit cards a little bit to get by.  If you are unable to set aside even $100 a month for 20 months to save a small emergency fund, you should cut back on your expenses and stop eating out, buying all the cable channels, spending too much on a car, shopping excessively, or whatever it is you are doing to live beyond your means.

In the end, a lot of the European countries have 12-18 month safety nets where you continue to be paid an almost full salary while you can look for another job, or even go back to school tuition free to update your skills.  Someone in a European country that says "that's ok, I have a social safety network that will pay me a stipend" is just as irresponsible as someone in America that says "that's ok, I have home equity I can tap into in an emergency."

[Tortoise]

Demand or not, most civilized countries consider a short-term loan with 400% interest rate "loan sharking" and it is illegal.  Only in the US is it allowed.  Sure, in the end you have to put the responsibility on each individual for their own financial destiny, but it's like opening up a "Liquor, Crack Cocaine, and Guns" shop, then wondering why everyone in the neighborhood is drunk, cracked out, and there are a lot of gunshot victims.  Some people are stupid and shouldn't be allowed to commit financial suicide.

Price caps create shortages.  So placing a cap on interest that lenders are allowed to charge produces a shortage of loans.  The reason "loan sharks" charge such high interest is because they must; the loans are at high risk of default.  The high interest is required to compensate the lender for the heavy costs associated with the large number of defaults.  It's the same reason why grocery stores located in crime-ridden neighborhoods charge higher prices than equivalent grocery stores located in safe neighborhoods.  The higher prices are not a result of systematic exploitation of poor people; rather, they are a result of businesses operating in high-crime areas and dealing with high-risk clients and customers.  The costs associated with the high rate of theft and default are passed on to the customers, as they must be.

If a cap were to be placed on "loan shark" interest, causing a shortage of loans, my guess is that crime would increase.  Most people don't commit theft or robbery to feed their families.  They do it to get money for drugs or any number of other things they desperately want but don't need.  Eliminating one of their only alternatives to crime--high-interest loans that allow them to buy what they want, right now--would almost certainly cause crime to increase.

The problems associated with poor people getting themselves into perpetual debt and committing financial suicide are systemic, a manifestation of the values and behaviors associated with the culture in which those poor people live.  Tinkering with various economic policies (interest rate caps, regulations surrounding "predatory lending," etc.) is unlikely to alter culture in any substantive way.  Cultures must be altered by other means, such as the spread of new ideas and the influence of strong leadership and role models.

[Pkg Man]

I modified my earlier comment as such: "There is no doubt that some people make poor choices".  I did not mean to imply that anyone without formal education makes poor financial decisions, and my earlier statement could be construed as such.  Neither of my parents finished high school, but they taught me a lot about money.  And of course, education is no assurance of sound financial management.  An attorney friend of mine has racked up thousands of dollars of debt on credit cards.

I can see the appeal of trying to protect people from themselves, and occasionally I even agree with it, but my default position is that preventing mutual exchange rarely improves anything.  I'm not sure that someone who frequently gets a payday loan or cash for their title is going to be much better off in the long whether those services are readily available or not.  I view their usage as a symptom, not the cause, of a larger problem.

[smurff]

Smurff, I see your point, in that a lot of Americans use their home equity as a savings account and might not see the need for cash, but I would argue that this is wrong.  With no emergency fund, if you lose your job, you will fall behind on mortgage payments and lose your house, including all equity you once had.

Some people say "I keep credit cards and home equity credit lines around for emergency purposes."  Again, I think this is wrong, because in a time of financial hardship, credit card companies and banks can and will change the terms of or revoke credit at a moments notice.  You cannot depend on credit availability in a hardship because in the end the creditors need to look out for their own best interests, as it should be.

The other point I would make is that anyone that is unable to save a $2,000 emergency fund is living beyond their means.  This means that every single dollar is spent and you've probably had to tap into your credit cards a little bit to get by.  If you are unable to set aside even $100 a month for 20 months to save a small emergency fund, you should cut back on your expenses and stop eating out, buying all the cable channels, spending too much on a car, shopping excessively, or whatever it is you are doing to live beyond your means.

In the end, a lot of the European countries have 12-18 month safety nets where you continue to be paid an almost full salary while you can look for another job, or even go back to school tuition free to update your skills.  Someone in a European country that says "that's ok, I have a social safety network that will pay me a stipend" is just as irresponsible as someone in America that says "that's ok, I have home equity I can tap into in an emergency."

I agree with you on all of these points, Storm.  Those same Europeans who do not save because they expect the social safety net to catch them, will march in the streets and burn down city hall and local shops if there is even a hint that that safety net might be tightened. 

I used to live in Europe, and I assure you, there is the kind of financial irresponsibility you describe on both sides of the Atlantic.  Which is why I tend to object to characterizations of Americans as being, overall, less savings-oriented than Europeans.  Wastrel adults exist all over; sometimes Americans are made to look worse on this point because of our openness. 

[smurff]

Anyhow, as a sort of side issue, I wonder if some people don't understand the options they have available to them to raise cash.  If you absolutely, positively have to raise cash, you can:

• Use your savings (if any)
• Take out a loan against your 401(k) (if any)
• Dramatically scale back your spending
• Borrow from friends or family
• Carry a balance on your credit card
• Get a new credit card
• Take out a reverse mortgage
• Open a HELOC
• Sell or pawn items (such as jewelry or furniture)

And it's not just poor people who do some of these things--selling/pawning especially.  Many an asset-rich/cash-poor family's financial crisis is dealt with by selling or pawning items--in these cases, the items may be Old Masters artwork, genuine antiques, Art Deco jewelry, etc.--and the pawn shop is a place like Provident, Circa Jewels or Sotheby's. 

[vnatale]

I modified my earlier comment as such: "There is no doubt that some people make poor choices".  I did not mean to imply that anyone without formal education makes poor financial decisions, and my earlier statement could be construed as such.  Neither of my parents finished high school, but they taught me a lot about money.  And of course, education is no assurance of sound financial management.  An attorney friend of mine has racked up thousands of dollars of debt on credit cards.

I can see the appeal of trying to protect people from themselves, and occasionally I even agree with it, but my default position is that preventing mutual exchange rarely improves anything.  I'm not sure that someone who frequently gets a payday loan or cash for their title is going to be much better off in the long whether those services are readily available or not.  I view their usage as a symptom, not the cause, of a larger problem.

My jaundiced view is that it's basically the American way to make poor financial choices. It's our culture. I remember during the August 2011 government shutdown and I was looking around me and seeing that aside from me, my close friends, my organization for which I worked, and my country were all in dire straits -- all because of poor financial decisions.

Vinny

[mathjak107]

we really don't know what people have .. you can look at the poorest communities here in nyc and statistically they are poor . but many have quite a lot from the over 1 trillion dollar under ground economy .. i have little interest in what others have . good or bad it is what it is and there is nothing i can control