It's Not a Saving Problem...

A recent survey by Bankrate.com shows that 29% of American adults have virtually nothing in terms of emergency savings.

The typical financial advisor will recommend that you have at least a six-month emergency fund. Yet the survey showed that only 22% of Americans meet this standard, meaning 78% do not have emergency savings that would last six months or more.

Unfortunately, many people end up having “emergencies.”  The most common are unforeseen medical expenses and car repairs. Really, most of these situations should not be unexpected. For example, if you drive an older car, you should probably factor in some extra expenses other than oil changes.

Many articles on this subject are critical of Americans for the lack of savings. They will say people should pay themselves first and suggest automatic savings plans, where a portion of each paycheck automatically goes into a separate savings account.

While these are sometimes good suggestions, the problem arises that most Americans would not be able to pay their bills if they put even a couple hundred dollars each month directly toward savings. Savings won’t do you any good if you can’t pay your bills or if you are accumulating credit card debt.

The Latte Factor

Some critics will point to American consumerism, saying Americans aren’t saving because they have to buy their daily latte, get their nails done once a week, and have their smartphones. And some are just downright irresponsible in spending excessive amounts on alcohol or gambling.

It is certainly true that some Americans are frivolous with their money. It is hard to feel sorry for someone who has no emergency fund yet spends the weekend at the casino or buys $50 in lottery tickets every week.

The truth is, though, a lot of Americans who are struggling to get by are not being irresponsible with their money.  Is it so bad if someone has a smartphone in today’s society? Isn’t that a luxury we should be able to enjoy?

There are a lot of people struggling that do not buy lattes. Or maybe they buy one or two per week as a special treat.

But let’s face reality here: If you forego a latte once or twice a week, is an extra $5 or $10 per week really going to add up to much? Are you going to give up your special treat so you can save just a couple hundred dollars over an entire year?

Then the little money you do have sits in a bank account that earns almost no interest while losing purchasing power due to inflation.

So by cutting out those special treats a couple of times per week, maybe you can amass a few thousand dollars over the course of your working career… Big deal!

It actually starts to make sense why Americans aren’t saving more. It is not as if you are going to enjoy a comfortable retirement because of your latte savings.

Why the Struggle?

Americans really are struggling right now. The median household income, adjusted for inflation, has been basically flat over the last several decades. We are better off with cell phones, computers, big-screen televisions, and some other things. Unfortunately, the costs of basic needs are not getting cheaper.

The Federal Reserve says price inflation is running below its target of 2%. How is that low price inflation working out for you in terms of your health insurance premiums?

Most Americans are seeing their premiums go up 10%, 20%, 30%, or more, and that is on an annual basis. When we talk about compounding interest, it is usually in reference to savings. But we are seeing the compounding effect on increasing health insurance premiums.

Health insurance is taking a huge chunk out of people’s budgets. And while their premiums go up, the coverage from their plans gets worse.

Obamacare is contributing to this, but let’s not pretend it is the only cause. Health insurance and medical care have been going up in price a lot for the last couple of decades. The government continues to get more involved in every aspect of the system, and it has driven prices through the roof.

Taking a look at the bigger picture, government at all levels is consuming our wealth. Last year, it was reported that government spending at all levels (federal, state, and local) per household in 2009 through 2011 actually exceeded the median household income.

For example, in 2011, the latest year with full data available, total government spending at all levels exceeded $6.1 trillion. That included over $2.5 trillion in state and local spending and almost $3.6 trillion in federal spending.

When you divide that by the number of American households, government at all levels spent $50,506 per household. The median household income in 2011 was $50,054.

Are you getting $50,000 worth of government benefits for your household?

How is the middle class going to prosper when the government is spending more than the median household income? This doesn’t even take into account the massive regulation that adds huge costs to our economy.

The reason most Americans cannot save money is because it is being consumed by the government. It isn’t just the income taxes, property taxes, and sales taxes that you actually see. There are so many hidden taxes, we have no idea just how much is being taken from us. This includes government debt, which is still siphoning off wealth from the people.

A Government Problem

Some Americans do have a spending problem. They buy too many things they don’t need. Some go one step further and buy things that are self-destructive.

But for the majority of Americans, it is not so much a spending problem with themselves; it is a spending problem with their government. It is not a lack of savings that is the problem; it is a problem of the government taking their money.

Imagine if total government spending were cut in half. We can debate all day long on what should get cut first. But let’s face it; one of the big problems we have is that everyone is trying to live at the expense of everyone else. 

Even if your favorite government programs were cut, imagine what your household would do with an extra $25,000 per year. You could take a nice family vacation. You could donate some money to your favorite charity. You could invest more in yourself. You could use it as a down payment for a house. And yes, you could definitely save money and build up an emergency fund.

And that is $25,000 in just one year. Now imagine you keep retaining an extra $25,000 every year thereafter. Think of how much better off your life could be. Think of the better use you could put that money to instead of giving it to some bureaucrat in Washington, D.C. or your state capital.

Americans should save more, but first they should demand a significant reduction in the size and scope of government at all levels. At some point, it becomes unsustainable. It already is. The government bubble is going to pop at some point.

I see Americans struggling. They work hard and have little to show for it. These are not just people making minimum wages. It includes middle-class families and even upper-middle class families. Your number one expense is not your mortgage, your car payments, or your health insurance premiums — your number one expense is government.

When the government bubble pops, it will be difficult at first. But it won’t be as difficult as continually handing over a big chunk of your income to politicians and their agencies.

After the government bubble pops, it will be a huge relief for most families. They may actually start saving again.

Until next time,

Geoffrey Pike for Wealth Daily