Why “Pay Yourself First” Isn’t Exactly Good Advice

Many previous clients have tried various techniques to save, but often struggle to build lasting strategies. And while options like “prioritize savings” and “pay yourself first” make for good sound bites, these approaches don’t make a lot of sense. You can’t just prioritize savings and somehow think everything will be okay. Sooner or later, bills, expenses, and reality WILL set in…just like it has for many Americans time and time again.

Savings Highs, Lows, and Plateaus

We used to be a nation of okay savers. Not great, but okay. But then, in the two World Wars (particularly in World War II), the federal government intervened and encouraged people to save. It did this via two innovations: 1) the introduction of U.S. savings bonds right before World War II, and 2) the Federal Deposit Insurance Corporation introduced in 1934 which guaranteed the deposits of small savers in most American banks.

As a result, for several decades we saved at pretty good rates (between about 7 and 11 percent). Then in the 1980s, Americans stopped being good savers—at first slowly and then very rapidly. In fact, U.S. household saving rates peaked at around 11 percent in 1980, but by 2005, they had plummeted to near zero. This was partly due to housing and consumer credit becoming available to Americans in amounts unlike anything seen before.

Unfortunately though, this reliance on easy money soon came to a crashing halt when housing prices collapsed hard in 2008. Because of this Great Recession, many people became re-determined to build a nest egg and no longer let the financial stress of the fallen economy dictate their lives. This caused a spike in 2012-2013, when savings rates climbed above 10% – an incredibly positive sign. (Well, positive for consumers at least. This growing rate actually had the Feds worried that all of the quantitative easing was just going toward savings accounts and investments, not consumer borrowing and spending.)

I Almost Forgot I Had Amnesia

But it didn’t take long for amnesia to set in and the Great Recession became a distant memory. People started to spend and the savings rate plummeted again, as you can see in the chart below.

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Why Americans Haven’t Changed Their Behavior

So, why can’t Americans (who save far less of their incomes than most Europeans, Japanese, or Chinese) save even during a supposed recovery? Put simply: People are making less money as real wages have stagnated or fallen. While jobs are plentiful, the quality of the jobs and incomes are lacking, which is ultimately affecting household budgets.

“American household budgets, at almost every income level, are really tight,” says Greg McBride, Bankrate’s chief financial analyst. “They haven’t been able to move the needle on savings over the past several years, and the inevitability of unplanned expenses has chipped away at what they had.” It’s a huge problem, he adds, because not having money in the bank to fund a few months’ worth of expenses can keep you up at night.

This analysis is confirmed by a recent Bankrate report which found that nearly half of all middle and upper middle class Americans (which is defined as those earning between $50,000 and $125,000 annually) are saving no more than 5 percent of their income. And one in five, or 20 percent, is literally saving nothing at all.

Admittedly, some people are trying to reverse this trend and build up their savings, which leads us back to our original discussion about why paying yourself first isn’t exactly the best way to achieve that goal.

Don’t Just Pay Yourself First

Binge savings programs such as paying yourself first don’t work any better than other types of quick fixes when it comes to financial steadiness. In other words, you can’t just pump up your savings without understanding your personal cash flow and without a plan. Instead, savings requires a thorough evaluation to find a way to accumulate money while minimizing the impact on your current lifestyle and existing financial requirements—making it more sustainable over time.

While there are no quick fixes to savings, with a thoughtful approach there CAN be a happy ending as you will be able to finally:

  • Get off the roller coaster ride of money coming in and money going out.
  • Overcome your fear of retiring without the means to maintain the lifestyle you’re accustomed.
  • Better yet, move beyond the fear of not being able to retire on your terms and your own timetable.

At Spending Plan Advisors many of our clients are financially sound. They have a good family income, somewhat manageable debt, and all of their bills are being paid on time. So why contact us?

The answer is quite simple – savings!

Give us a call if we can help you save. Often our clients start saving slowly and build up over time. Isn’t that the way it should be?