We're Starting To Save Again
According to the latest figures, we're starting to save more. Alas, thanks to the savings paradox, this is both good and bad news...
During the housing boom which lasted from 1995 to 2007, we went on the biggest borrowing binge in British history. In fact, in the twelve years between September 1996 and September 2008, personal debt (including mortgages) more than tripled from £480 billion to £1,457 billion. Ouch!
What's more, the UK savings ratio (the proportion of our disposable income which we save) has declined dramatically. As you can see from the table below, the savings ratio turned negative in the first quarter of this year, which means that we spent all that we earned, plus a bit more:
Quarter | Savings ratio (%) |
Q2 2007 | 3.2 |
Q3 2007 | 2.3 |
Q4 2007 | 1.8 |
Q1 2008 | -1.1 |
Q2 2008 | 0.4 |
The data show that the savings ratio declined for four quarters in a row, reaching a low of -1.1% in the first three months of this year. However, in the second quarter of 2008, it turned positive again, although we're still saving a pathetic £1 for £250 of take-home pay.
It's quite normal for the savings ratio to rise in troubled times, particularly during economic downturns and housing crashes. As the old saying goes, "When times are good, save. When times are bad, save harder". Indeed, during the last recession, the savings ratio peaked at 11.7% in 1992, a time when we saved more than one pound in every nine.
The savings paradox
Although I'm delighted that Britain is rediscovering the simple virtues of saving, it's not all good news. Indeed, while saving hard makes perfect sense for the individual, it can be disastrous if the whole nation gets the savings bug. This is because so much of our economy is built on credit (personal, corporate and government).
Thus, we have what's known as the `savings paradox', which is where increased thrift leads to lower consumer spending, reduced company profits (especially among retailers), rising unemployment and a deeper and longer downturn. So, when consumers tighten their belts and the savings ratio climbs, the UK economy tends to suffer.
Then again, it's not your job to worry about the entire nation. From a Darwinian, self-interested perspective, your goal is to survive the financial hurricane to the best of your ability. Of course, in troubled times, everyone needs a decent cash cushion to fall back on. So, don't let what could happen to your neighbours, family and co-workers put you off saving. It's very much in your personal interest to save for a rainy day.
Two savings tips
Ideally, I recommend that adults try to save a tenth (10%) of their pre-tax income. However, this is beyond the reach of many workers, so just try to save what you can. To make the most of your savings, aim to earn a high rate of interest and avoid tax (for example, by using a tax-free cash ISA).
Finally, keep your emergency fund somewhere where it's easy to dip into, such as an easy-access savings account. By doing this, you can be sure that your money is there when you need it most -- and not locked away in an account with too many strings attached!
More: Search for a superior savings account | The Smartest Savings Account In Britain | Who Stole Our Savings Habit?
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Hi Luniversal,[br/][br/],i>'I hope TMF henceforth spends far more time studying the savings market and agitating for decent real rates of return after tax.'[br/][br/]We've often pointed out that most savings accounts don't offer a great real rate of return. Indeed the majority of savings accounts offer a negative rate of return. We've pointed out that some Cash ISAs can be useful as the tax break helps to boost the real return.[br/][br/]That said, savings accounts are never going to offer large real rates of return. Low risk is always going to mean a relatively low return.[br/][br/]That's why we've always been keen on long-term investment in the stock market as that can often lead to a better real return. But, of course, the risk is higher.[br/][br/][i]'instead of expatiating endlessly about tracker mortgages, 0% balance transfer deals on credit cards, payment protection insurance policies and the like.'[/i][br/][br/]We have published a lot of articles on the above subjects, but I don't regret that. [br/][br/][b]Payment Protection Insurance[/b] has been a scandalous rip-off. I'm delighted that this is now more widely understood amongst the general public. TMF - and Cliff D'Arcy in particular - has, I think, played a part in spreading that message.[br/][br/]We've been absolutely right to look at [b]tracker mortgages[/b] over the last couple of days. It's a very big issue when the base rate is falling fast. And, in general terms, a mortgage is the biggest financial commitment that most people make. So I think it makes absolute sense to write regularly on this topic.[br/][br/]Re [b]0% Credit Cards[/b] : They're a useful tool to help people fight debt. And if you feel you must borrow, they can be useful for that too.[br/][br/]Don't get me wrong though, we'll continue to write about savings.[br/][br/]Regards,[br/][br/]Ed Bowsher [br/][br/]PS. I know I originally said I was only going to reply to one message. I changed my mind. :) I could happily reply to many more, but I've got to get on with my day....
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I'd like to reply to just one comment on this thread. It's by Gartons/CR Apspray. [br/][br/]He says:[i] 'I despair with TMF. The only contributors who write anything remotely approaching sound financial comments are Neil Faulkner and Cliff D'Arcy who once referred to Britain as "Fantasy Island" in regard to our finances. The latter says everything![/i][br/][br/]This article, which you dislike, is written by Cliff D'Arcy.[br/][br/]As you say, Cliff has repeatedly warned against our debt culture over the last few years. He also warned that house prices were too high. He was much criticised for this but has been proven right. [br/][br/]However, things have changed. The global economy is in a very serious mess. Yes, the debt culture is a primary cause of this mess. But if everyone in the UK and US started saving now, things would get worse. [br/][br/]We need demand in the economy or we'll go into a deflationary world and have an economic slump.[br/][br/]So right now, more borrowing - leading to more demand in the economy - is the lesser of two evils. But at an individual level, the rational approach for most of us is to try and save more or reduce our debt more quickly. [br/][br/]That's what Cliff was writing about. And he's right.[br/][br/]Regards,[br/][br/]Ed Bowsher, Editor, TMF UK
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Why all this short term focus? This problem has been decades in the making and yet we look back 1/4's and by maybe 5 years.[br/][br/]Brown says spend, Obama says spend as does the EU, Asia & Africa. This may sound a bit dumb, but who is going to be doing the lending? Iceland is at 18% and holding and the UK is at 3% yet planning great deficit spending.[br/][br/]If I was an investor who has been hurt by UK devaluation or the US housing mess I'd be holding my money. To me that spells long term global deflation, not inflation.[br/][br/]Right now my personal goal is eliminating debt, when that is done I am going for mixed foreign currency savings. In 5 years I'll look at buying another house
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08 November 2008