One of the most disturbing long-term trends in personal finance is the steep decline in savings rates over the years. There is a distinct difference in how Americans save today and how they saved in past generations.
This raises a couple key questions about the present and the future:
- Are savings habits a product of the different influences and experiences of each generation?
- Will the next generation do a better job of saving money than their parents?
Children of the Depression vs. baby boomers
There’s a widely-held belief, which I believe has some merit, that both those who grew up during the 1930s economic depression and the post-World War II baby boom generation developed lifelong financial habits which were largely products of their upbringing.
Having gone through the severe deprivations of the Great Depression, people who came of age around that time developed very cautious financial habits. They had seen how jobs and wealth could disappear in a blink of an eye. They knew that hard times didn’t simply mean making do with a little less – it could mean hunger and homelessness. For this generation, putting something aside for a rainy day became a survival instinct.
Baby boomers grew up in a different world. The post-war economic boom was a time of emerging prosperity which turned the national outlook from fear to hope. Each generation, it seemed, would have even greater opportunities and wealth than the last.
Obviously, this was a nicer time to grow up in than the Great Depression, but that pervasive optimism fostered some irresponsible financial attitudes. Why save when things are just going to keep getting better and better in the future?
The numbers demonstrate the generational difference. In the thirty years from 1941 through 1970, personal savings rates in the US averaged 10.2 percent. In the thirty years from 1981 through 2010, those savings rates averaged just 5.6 percent. By the way, savings rates over the past couple years have been even lower.
Again, it is reasonable to think that the differing experiences of Depression-era children and baby boomers had a great deal to do with their respective attitudes towards saving money, but I think there is more to the story than that. Today’s low savings rates may be a product of more than just phases of the economic cycle.
For one thing, the aggressive marketing of debt is a phenomenon of the last forty or fifty years. Teenagers get credit card applications on their eighteenth birthdays, if not before. You can’t shop at a major retailer without being invited to open a new credit card. People with credit card balances are not pressured to pay off their debts; instead, they are encouraged to make the minimum payment so as to maximize the lender’s interest by prolonging the debt.
Another non-cyclical force is government policy. You’d think the government might be alarmed at how personal debt has grown over the past 30 years or so, but instead they influence people to keep on borrowing. Government policies actively contributed to the housing boom.
Even now, what is the Federal Reserve’s response to a financial crisis that was caused by over-borrowing? They’ve lowered interest rates to encourage even more borrowing.
You see, the government isn’t thinking about what will become of that debt in the long run. They just want people to keep spending, so the economy can generate stronger tax revenues. After all, the government has a debt problem of its own…
Teach your children well
So, it may be that a combination of cyclical economic patterns and non-cyclical societal changes have contributed to the irresponsible spending habits of baby boomers. Turning to the next generation, you could argue that the Great Recession might turn out to be a constructive experience for people coming of age right about now.
The recession of 2008/2009 was not a short-lived setback from which parents could easily shield their kids. Not only was the recession itself fairly long, but its impacts have lingered for years afterwards. Young people today have seen older family members experience months or years of unemployment and under-employment. They’ve seen their peers graduate from college with mountains of debt and shaky job prospects.
Based on the example of children of the Depression, you might expect that when this up-and-coming generation finally gets its hands on a few dollars, it will hold on tight to them and prepare for the future. Remember though, that in addition to the cyclical influence of the Great Recession, there are non-cyclical influences of debt marketing and government policy at work.
Ultimately, parents need to teach their children to ignore many of the financial influences that are pervasive today. Young people like the idea of being independent, so emphasize that the path towards financial independence lies in rejecting debt and building savings.
And hope, like most parents secretly do, that these kids handle things better than their parents did.