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Wednesday, December 14, 2005

What the heck is saving?

This article about relative savings rates in the US is interesting reading: San Jose, CA, where I grew up, is the highest-rated "saving city" in the US. This isn't surprising: San Jose is a fairly rich city with a household income around $70K, and has a large population of high-saving immigrants.

Anyway, I digress. The question I want to ask is "what is savings?" This dictionary definition has the personal savings rate as disposable income minus personal consumption expenditures.

In my own example, my wife and I max out our 401Ks, and she has a self-employed 401K. In total, we put about 20% of our gross income in these 401Ks. We also max out Roth IRAs, and have other taxable savings.

As far as I can tell, 401Ks and possibly IRAs aren't considered disposable income, so they wouldn't count towards our own savings rate. I wonder how much of the low savings rate in the US is due to people saving into these sorts of vehicles?

For our part, we use a relatively expansive definition for our own calculations: savings is the increase in net worth that results from setting money from wage or business income aside. This would include putting money in a 401K, mortgage principal paydown, putting money in a savings account, or our monthly deposits to investment accounts.

So, if you use change in net worth as your savings rate, then you could have a negative savings rate when your investments perform poorly, even though you packed it away. And, in an up market your savings rate would be articicially inflated.

I thought this study was interesting. Basically it said that people who make a lot of money save more than poor people. Geez!
Actually, what I meant by my definition was to make sure 401Ks and things like mortgage paydown were included in "savings". Fluctuations in investment shouldn't count as savings or dissavings.

And you're right; the study showed that savings rates are strongly correlated with being rich. Surely that's worth the next Nobel in Economics...
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