This week has been dubbed American Saves Week by the Consumer Federation of America, a non-profit organization founded in 1968 “to advance the consumer interest through research, advocacy, and education,” according to the organization’s website. All this week, the group and many partners in the non-profit world, in the financial industry, and among publishers will be promoting concepts related to responsible care of personal finances.

Although I had always been aware of the importance of saving money — whether for emergencies, for the distant future, or for upcoming purchases — my problem as a kid and a young adult was that I thought I wasn’t earning enough money to save. And if you looked at my cash flow statement at the time, you wouldn’t have been able to argue with that.

My first permanent job out of college was with a non-profit organization 66 miles from my home, up the New Jersey Turnpike. It required travel over the weekends, and there wasn’t much reimbursement for those expenses. Considering rent and other basic expenses, my low salary was barely enough to cover my ability to maintain the job. If I were to take into account the number of hours I worked, I would be too scared to determine my effective hourly rate.

All things aside, it could have been a very satisfying job, under other circumstances. But it wasn’t, and I suffered mentally and financially. Nevertheless, I started contributing just a little bit into savings. Although I thought I wasn’t earning enough money to save, I found occasional opportunities to choose to deposit rather than spend. I made some sacrifices. I moved closer to the job. I did what I could to start moving in the right direction, even if slowly.

I was part of the 64 percent of Americans who, according to the National Foundation for Credit Counseling, wouldn’t be able to come up with $1,000 to pay for an unexpected expense without neglecting responsibilities or going into debt.

The best changes came after I left that job. I found myself a less stimulating but more financially responsible position, learned more about personal finance, and found out what it was like to be able to save money regularly rather than haphazardly.

When you have a positive cash flow every month and you are out of debt, every dollar you earn goes to you — not to the credit card companies, not to the banks’ profit lines. Sure, you still have expenses, but when you have money left over after your basic needs are covered, you have the choice of saving or spending without going into debt. And having that choice is freedom; everything else is a form of financial slavery (or indenture).

Savers don’t always have it easy. The government is charged with the task of stimulating the economy, and the widely accepted theory is that the economy grows more when people spend compared to when they save. At the same time, in difficult economic environments when people are concerned about the security of their jobs and paychecks, people are inclined to save money for financial protection.

Consumers who put money into savings accounts while the economy was running smoothly were rewarded with interest rates as high as 5 percent, with bonus rates even higher. This was almost double the rate of inflation. In other words, you could hold your money in a bank account for a year, and it would be “worth” more in terms of purchasing power than it was worth when you deposited the funds. Banks were willing to pay high rates because they were able to use savers’ money to lend to other customers, many of whom were making so much money in the real estate market, flipping houses for example, that the banks were able to sell expensive loans.

In today’s environment, the banks aren’t writing as many loans, and the financial industry is flowing with low-cost money from the Federal Reserve. There’s no need to pay customers high interest rates on savings accounts because the banks have everything they need at government-inspired low rates.

In this economic situation, there are some financial experts who are saying this is a good time for borrowers, not savers. Borrowers are being rewarded with low rates, particularly in the real estate market. This is supposed to inspire the real estate market, and then eventually the stock market and the economy as a whole, but two things are still keeping this recovery slow: the unemployment rate is still higher than it’s been during better economic times and banks are more stingy with loan qualifications than they were during happier periods. As a result, people don’t feel great about their jobs and potential for future income. So while we may be out of the Great Recession, we don’t feel fully recovered.

Without the financial reward of savings interest rates above inflation, why still save? Why not take advantage of low interest rates and buy assets that have a good chance of appreciating in value? I have some thoughts about my motivation, which I’ll share here. What motivates you to continue saving without the financial reward?

Here’s why I save:

• It’s not all about the interest. My savings accounts may be part of my overall financial strategy, but it’s not an investment in which I expect to earn money. I don’t need to earn interest to save, though the higher the interest, the better. The purpose of saving money is partly for emergencies. Knowing I can get to my savings quickly and that it won’t lose value (except for inflation) keeps at least some of my money in a bank account.
• Saving provides financial freedom. If you want to buy a $1,000 television but you have to put it on your credit card, you may end up paying $1,500 or more for it. By the time you’ve made your last payment, the television might only be worth $500 or less! That’s not as good of an example as something that happened to me recently. My mother was in the hospital on the other side of the country; because I had savings set aside, I could buy a flight at the last minute. Normally I’d only buy airplane tickets in advance to avoid high prices, but that’s not always possible. The flexibility to do what I need to do, when I need to do it, without needing to ask whether it would create a financial hardship, is the kind of freedom provided by saving.
• Saving makes me feel good. I have a fully-funded emergency plan. It involves more than just cash or savings accounts. It has tiered access, and is more helpful and more rewarding than just an emergency fund. Being protected from emergencies in this matter makes me feel secure in knowing that I’m unlikely to face an unexpected expense that I can’t handle.
• I can take more risk in other areas of my life. With a strong back-up plan and healthy human capital, I can afford to take some risks with my life. I quit my regular job to work for myself a few years ago, but only after I was secure with my finances. I could move out of my apartment, absorbing the expenses, if it makes sense for me to move. I’m able to diversify my assets across a broad range of investments, with a meaningful investment in many thanks to my savings.

Perhaps the day will return when savers are rewarded with higher interest rates, but I’m not counting on that happening any time soon. If not for earning interest, why do you save money?

Photo: Flickr

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This is a guest article by Jason Larkins. Jason is the Director of Financial Education at Wise Wealth, LLC in Lee’s Summit, Missouri and the author of the website WorkSaveLive.

For years I had my personal struggles with money: spending more than I made, following the status quo, and living life like I’d die tomorrow. Debt piled more quickly than I could have imagined and after years of digging a hole I eventually found myself buried under $110,000 of debt.

Those struggles — calls from collectors, thoughts of bankruptcy, sleepless nights — eventually would be overcome and my life’s transformation would result in me changing my career, taking a pay cut of $70,000 and pursuing a job which involved becoming a Dave Ramsey-trained counselor and a financial adviser.

What I’ve learned from my own struggles, and from coaching hundreds of people over the last three years, is that my problems (as with most peoples’) stemmed from a lack of knowledge, a lack of common sense about how money should be handled and viewed.

Common sense and money

Whether you were raised by financially savvy parents, or had to learn by way of life’s teachable, often unforgivable moments, the fact that you’re readers of a highly popular finance blog would suggest that you have some common sense when it comes to handling money.

Some of this knowledge may include understanding:

• Budgeting
• Living within your means
• Investing for your retirement
• Keeping cash to serve as an emergency fund
• Saving for your children’s college education
• Managing debt wisely, including getting a 15- or 20-year mortgage

Despite once believing that most people (the status quo) understood these principles, I learned the hard way that one should never make assumptions.

After becoming a financial adviser I began to do research on the average American’s struggle with finances. I wondered why so many people struggled saving for retirement, living within their means, saving for rainy days, and managing their debt levels.

Through a series of events, I found myself researching the savings rate (specifically the percentage of disposable income) and overall consumer debt over the last 40 years. The trends were quite shocking:

The blue line shows the total consumer debt (credit cards, personal loans, and mortgages, excluding student loan debt) in trillions of dollars. The red line shows the average percentage of disposable income that a person saves in a given year.

The major increase in debt from the early 1990s to 2008 is due to the ballooning of the housing bubble. It’s no wonder that so many experts predicted that it would eventually burst. While it looks like people started to pay off debt post 2008 (when the graph starts to go down), it’s most likely that the decline in debt levels was from foreclosures and bankruptcies.

While the consumer debt illustration is terrifying, the savings rate doesn’t make me feel any better. From 1983 on, there was a steady decline year-after-year in the amount that Americans were stashing away. While there was a spike in savings after the 2008 recession, primarily from the fear that swept the nation during that time, the statistics show that we’re trending back down and falling into our poor behavior.

What’s the explanation?

If common sense suggests we’re not supposed to go into debt and we’re supposed to save, why has the exact opposite been the status quo for the last 25 years?

Some will suggest it’s solely because of the increase in housing prices; others believe it’s because wages haven’t outpaced inflation over that time period.

While these realities have added to the cause, I believe a lot has to do with our lifestyle changes over the years:

• Introduction of technology: cell phones and bills, cable TV, computers, internet, etc.
• Traveling and vacations: sure, these have been around for ages but it’s almost taboo not to go on a yearly vacation these days.
• Our desire for the “bigger, better, nicer, newer” as I call it: houses, cars, TVs, clothes, colleges, you name it.

Maybe it’s simpler than that

While my experience tells me that the materialistic shift in our culture over the last 30 years has a lot to do with our recent struggles, there is a fact that I can’t ignore: interest rates.

Some people believe that when rates are low you should take advantage of leveraging money. Borrowing money is cheap now, right? Why not go buy a $300,000 house (a little more than you can afford) when the rates are only 2.85% on a 15-year fixed mortgage? What about that nice car you’ve been looking at? If you sport a good credit score it’s pretty easy for you to get under 2% financing.

Furthermore, a decline in interest rates appears to discourage savings. The trend lines between the savings and interest rates are remarkably similar! Why save money when you can only get 1% in a good CD or money market account? The stock market isn’t yielding anything, so why bother with it?

Declining interest rates, declining common sense

Now more than ever it seems that families across the country are struggling with money. While it could be for a number of reasons, the charts above suggest that as interest rates decline, we forget the basic financial principles that were common back in the mid 1900s.

Gone are the days of living on less than you make, avoiding debt, and saving for retirement and rainy days. It appears that we may only regain our financial wisdom when interest rates start to go back up.

Have you noticed a shift in your financial mindset as interest rates have declined over the years? Have you saved less and leveraged money more than you would have otherwise?

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