5 Ways Americans Sabotage Their Savings

How Americans Spend moneyWhile the latest news proclaims that the economy is rebounding, the truth is that most Americans are wasting their money. Spending is up, which is good for the economy — but can spell bad news for consumers on a personal level.

“Consumers who find themselves mired in debt are serving the larger economy at great personal sacrifice,” said Stuart Vyse, professor of psychology at Connecticut College and author of “Going Broke: Why Americans Can’t Hold on to Their Money.”

“The economy runs on consumption, and as a result, personal savings is never mentioned because it is considered counterproductive and a drag on the economy,” Vyse said.

According to the Employee Benefit Research Institute’s (EBRI) annual Retirement Confidence Survey, Americans are living longer — and they do not have anywhere near enough saved in their bank accounts for retirement. In fact, the report found that the majority of Americans (57 percent) have less than $25,000 in total household savings or investments.

Where and How People Spend Money Instead of Saving

Certainly recent economic hardships have reduced disposable income and the ability to save for many, but are there other factors influencing how Americans spend money? We asked financial experts why Americans can’t seem to keep their money in their bank accounts.

1. Lack of Personal Finance Education

“One of the main reasons that people don’t save money in the short- or long-term is that they’re simply unfamiliar with concepts such as setting a monthly or annual personal budget and saving for retirement,” notes Andrew Schrage, co-owner of MoneyCrashers.com.

2. No Emergency Savings

Too many people have experienced unexpected financial hardship, caused by being out of work for long and short periods of time, or having a car breakdown or health crisis that an emergency fund could help cover.

“Despite how high a salary might be, one is likely to be broke due to the lack of preparation for emergencies,” said Xavier Epps, owner of XNE Financial Advising, LLC in Woodbridge, Va. “Emergency savings is the key to financial success and without it, you’re just making it more difficult to be financial stable.”

According to the Bureau of Economic Analysis, Americans only saved 2.5 percent of their income on average for the month of April, 2013.

“Consumers should aim to save much more in order to cover unexpected expenses and possibly job loss,” recommended Epps.

3. High Inflation

Some personal finance experts point to inflation as a big factor in suppressing people’s ability to consistently add to their bank accounts.

“Our government deficit spending has skyrocketed, and the main cost of that spending is weaker buying power for the dollar,” said Brian Luftman, founder and president
 of American Farm Investors in Lexington, Ky.

“Our government says inflation is at 3 percent, but Americans are paying significantly more for food, heating and cooling bills, gasoline and healthcare,” Luftman said. “All of those costs have virtually doubled since 2008, and very few Americans are making any more money than they were in 2008. I think real inflation is 10 to 15 percent a year, and I don’t see that changing.”

too many people spend money they haven't earned

4. Overspending Made Easy

“With social media like Facebook and Twitter and we can see what everyone in our own social circle is doing, what they are purchasing, and where they are eating, traveling and shopping,” said Rachel Parrent, community engagement manager for Vantage Credit Union. “Many times it makes us believe that if they can afford it, so can we.”

Simply put, too many people spend money they haven’t earned.

“People fall into bad habits like eating out regularly or thinking that spending a little here, a little there won’t amount to a lot by the end of the month,” said Kathy Palmer, vice president of marketing at Vantage Credit Union. “Credit cards and electronic purchasing make it much easier to spend than having cash in your pocket.”

These social pressures and the ease of spending combine to create an environment that “places enormous burdens on self-control” and how people spend money.

“All of the barriers to consumption have been removed: you can shop 24-hours a day, with or without cash on hand,” Vyse said. “The urge to purchase something can be satisfied in minutes without ever leaving home.”

Photo credit: SimpleIllustrations

5. Taking on Big, Long-Term Loans

“Perhaps the worst mistake people make is to assume large, long term debt burdens that are difficult to escape without the certainty of enough sustained income to support them,” Vyse said. “In today’s world, the most common examples are student loans and mortgage loans. If you have calculated incorrectly or if your income drops, these kinds of debts can have a dramatic effect on your life and well-being.”

Should circumstances change and the borrower is unable to make monthly payments toward these debts, there is no quick-fix solution.

Considering that the graduating college class of 2012 accrued an average of $29,400 in student loan debt, an increase of 63 percent in under a decade, rising college costs definitely play a role in the ability to save.

“By having to make significant monthly payments for student loans shortly after graduating, it can be virtually impossible to start an emergency fund or begin saving for retirement,” Schrage said. “It can even make staying on top of monthly bills a challenge, which often leads to credit card debt.”

Brian Frederick, JD, CFP of
 Stillwater Financial Partners in 
Scottsdale, Ariz., adds that student debt doesn’t just affect younger generations, but parents as well.

“I’m seeing more and more people sacrifice 
their own retirement savings needs and run up large credit card balances to 
fund their children’s college,” Frederick said. “This can result in credit card debt of 
$20,000 and up at high interest rates — without a lot of excess cash flow
 to pay down the debt, they just keep paying the interest and not a whole 
lot towards principal.”

Tips to Jump-Start Your Bank Account

Devotees of personal finance guru Dave Ramsey know that the first step to gaining financial independence is putting away $1,000 for emergencies. Other financial experts recommend an even bigger emergency fund of three to six months of expense, to act as a buffer.

To get there, financial experts recommend eliminating everything but the basics to build up that emergency fund. That can mean cutting your cable service, cooking at home, trading high-lease cars for low-cost transportation, hosting yard sales or finding another job to supplement your income. It’s drastic, but a necessary way to get through, and prepare for, some tough times.

“Look for ways to cut or eliminate your monthly expenses and bills,” Schrage said. “Limit personal purchases only to those that you actually need, and clip coupons to save on groceries. All of these ideas should make for the ability to save at least a modest amount each month.”

In addition to limiting spending, Vyse advised cultivating a habit of saving. He recommends having a certain percentage of deposits automatically diverted to a savings account.

“This way, money is saved no matter what else happens, and it does not require a deliberate action on your part,” Vyse said.

Photo credit: Sophia D Photography

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  • Sharon

    I was a victim of all of these problems, until i realized that my dependence on money and keeping up with the joneses was my worst trait. It was ugly and I don’t do ugly, so I decided to make a change.

  • Basil Jiang

    I think its laughable that these personal financial advice columns don’t represent the true face of struggling American workers. Almost a majority of us are on public welfare programs like food stamps, section 8 housing, and SSI, because of low wages. Health insurance is unaffordable (mine is $450/month… contrast this to my $25/month auto insurance from 4AutoInsuranceQuote… or my $15/month renters insurance from Eagle). Two thirds of young adults have student loans to which they cannot pay back due to lack of good jobs in the community.

    A vast swath of Americans are locked out of the housing market because homes are turned into luxury goods, not a place to stay in the community. Rent rates at apartments have gone through the roof in most metro areas nationwide. Food at grocery stores have gotten way to expensive. Gas prices are so high. Property taxes are making it impossible for everyone to live comfortably in their townships.

    So, I’m guessing its not a matter whether people are financially inept with their money, but rather that our economy has been rewarding high income earners and punishing those on the social class bottom with low wages. Somebody who is a janitor, a maintenance man, or even a cashier at Wal-Mart shouldn’t be paid $6.20 per hour with no benefits. Its even worst with people with disabilities when we do nothing to give them a lift out of poverty. Sorry America – your system isn’t working!

    • Orange Guzzi

      Their advice, Your broke, give us $1,000 and now you are not broke. Love it. Told the bank yesterday, I will keep the money because you give me 1/4% interest and loan it back out at up to 36% interest. He grinned and I walked out with my money.

  • gghhhh

    Government will change new money after ww3 over. All the face bill will change no one will know who will be on the bills. Like what I mean is moron ppl will have 500 billion dollars sit at the house. After ww3 over thank to moron war. War and slave is the only one wasted for million year.

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