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Understand Your Finances

The difference between saving and savings

The following article is part of Money Matters, a Chase series that unpacks economic and financial trends, and issues.

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The current household saving rate is the lowest on record at 3.1 percent, but that doesn't mean consumers aren't thinking about the future—in fact, this low saving rate may be a sign of household financial strength.

In generations past, Americans saved an average of 8.5 percent of their income. Today, that amount has fallen to 3.1 percent, the lowest household saving rate on record. On the surface, it may look like consumers have become shortsighted in their spending habits—but a closer examination suggests that most households are actually in a stronger financial position than they've been in decades. The decline in the saving rate is likely due to improving balance sheets and rising net worth rather than a desire for instant gratification. There are several key ways to measure saving:

1. Saving vs. savings

Any measure of saving is most informative when viewed in the context of household net worth. People don't save in a vacuum—they put money away to achieve long-term goals, such as paying for their children's college education, buying a house or funding their retirement.

When people's household assets gain value, it brings their financial goals closer. In a long bull market, people may find that their stock portfolios are growing quickly enough to increase their net worth even without a large contribution from each month's paycheck. As household net worth has risen significantly over the last decade, it's natural for people to put more toward consumption than saving.

From this perspective, Americans' saving behavior has been relatively consistent. As the stock market boomed in the late 1980s, people began saving less of their income and relied instead on the rising market to help them achieve their financial goals. The total amount of money Americans have set aside for the future has grown by about 10 percent annually since World War II.

This steady growth of savings over the decades is a sign that current attitudes toward financial planning have not changed significantly from earlier generations. Americans may be saving a smaller share of every paycheck, but the total amount of money put away for the future has continued to climb.

2. Another measure of saving

When most people think of saving, they think of the headline saving rate, which is determined by simply subtracting spending from income. By this narrow definition, households are saving far less of their paychecks versus previous generations. But this provides a limited view of Americans' financial planning.

A broader measure of saving includes outlays for durable goods that will be useful long into the future. Consumers spending their current income on a product they can use for years is a type of deferred consumption. For example, the purchase price of a new car that can have a service life of a decade or more is actually funding consumption years into the future. Similarly, money spent on education and preventative healthcare is more akin to investment than consumption.

This expanded measure of saving shows that US households are putting about 8 percent of their current income toward future consumption. Although this figure has declined over the years, Americans are still using a significant amount of their disposable income to finance long-term plans.

3. Lower saving rate suggests financial strength

Viewed in the context of household wealth, the falling saving rate is a sign of strength and confidence. Compared with past generations, households today are making more and having less trouble paying their bills. Debt burdens have fallen to historically low levels—a lower share of income is going toward mortgage and car payments today than at any time in the past 30 years.

Rising real estate values and the stock market's climb have helped Americans come closer to realizing their financial goals. As households find their overall financial position improving, it's natural to feel comfortable spending more of every paycheck.

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