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Can We Save as Much as the Chinese?

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You've probably heard about how much higher the personal savings rate is in China than in the United States. But have you ever wondered whether you could save that much, and if so, what you'd do with it?

China is the yin to America's yang. At about 25% of disposable income, according to the Federal Reserve Bank of St. Louis, China's savings rate is the highest in the world by far. In the U.S., meanwhile, savings rates have declined steadily since 1982, going negative in 2006 for the first time since the Great Depression. In the aftermath of the worldwide financial crisis, it climbed back to 5% for the latest quarter -- which is still lower than where it was for most of the time from the end of World War II to the early 1990s. We've yet to regain even mediocrity.

But we Americans have been better savers at times. During the World War II, the personal savings rate briefly spiked to 26%, about where the Chinese are today. It brings to mind the image of Rosie the Riveter, rolling up her sleeves and saying "We Can Do It!" in a time of crisis.

Well, I think we can. So my family will try to save as much as an average Chinese family for the next few months -- 25% of our take-home pay -- and I'll check in regularly to let you know how it goes.

Better to spend than save?
Of course, there are some good reasons why the Chinese save more than Americans. In China, much of the social safety net has been pulled away since the 1980s, when reformists broke the country's "iron rice bowl" of job and benefit guarantees, leaving many Chinese entirely on their own to fund their retirement and pay for medical expenses. Because personal loans are hard to come by and few people invest, that meant a lot of disposable income started going under the mattress.

Americans, meanwhile, have for years now been in an environment where real-world inflation has probably been significantly higher than the widely reported core Consumer Price Index numbers, which discourages savings. And while incredibly low interest rates reduced returns from cash and bond investments, paper wealth from booms in stocks and housing seemingly alleviated the need for actual savings.

However, as we've all seen recently, that paper wealth can be fleeting, especially if you don't invest regularly. Just take a look at the chart below to see what happened if you made a single investment in seven widely held stocks 11 years ago -- even capturing the last couple of years of the dot.com boom -- and never put in anything else.

Stock

Initial Amount Invested on Sept. 1, 1998

Value of That Investment on Sept. 1, 2000

Value on Aug. 31, 2009

Compound Annual Return Over 11 Years*

Intel (Nasdaq: INTC  )

$10,000

$39,033

$12,124

1.8%

AT&T (NYSE: T  )

$10,000

$11,476

$10,391

0.3%

Cisco Systems (Nasdaq: CSCO  )

$10,000

$45,707

$14,400

3.4%

Pfizer (NYSE: PFE  )

$10,000

$13,607

$7,005

(3.2%)

Home Depot (NYSE: HD  )

$10,000

$17,762

$11,481

1.3%

Motorola (NYSE: MOT  )

$10,000

$25,453

$6,377

(4.0%)

Citigroup (NYSE: C  )

$10,000

$27,147

$3,324

(9.5%)

Total:

$70,000

$180,185

$65,102

(0.7%)

*Adjusted for splits and dividends.

It's not pretty. Stocks offer great returns -- more than other investments, especially given how low interest rates are. But to earn top returns, you need to make regular investments, rather than just tossing a one-time chunk of money into the market. That means a regular savings plan.

This is personal
I can already hear economists screaming that if every U.S. citizen boosted savings to 25%, it would throw the nation into a tailspin. But I'm not expecting most people to follow my lead. If I manage to save that much, it probably won't kill the entire economy. You can probably get away with joining me, too.

Besides, I have a situation on my hands. After years of looking the other way, I can't put off replacing my home's crumbling foundation any longer. After I took a sledgehammer to one of the basement walls and watched it explode into dust, I realized that I've been living in a sand castle. This project and a few related items, including replacing my 40-year-old furnace, will run us more than $60,000.

I hate debt. When Foolish colleague Tim Beyers talked about once having run up $45,000 of credit card debt, and then having blown it again, I was fascinated, chagrined, and sympathetic. But I never thought it would happen to me. I'm pretty careful and thrifty. And yet here I am, soon to be $60,000 in the hole. It doesn't sit well ... and so I'm responding with this challenge.

I know I have my work cut out for me. My eldest daughter, Zoe, is gazing wistfully at an American Girl doll catalog right now while my wife shakes her head at my suggestion that she lighten her roots with lemon juice. And nobody wants to hear my stories about how during the last World War, the British would eat their toast jam-side down so that they could taste every bit of the paltry smears their rations would afford them. (No idea if this is true or not, but I like the story.)

Still, I'm confident. Somewhere at the crossover of self-denial and family tension, I hope to find an equilibrium that lets us meet our goals.

So stay tuned. No matter what happens, I'll have observations and lessons to share. What's most exciting about this, though, is that it's a can't-lose situation from my perspective. Even if we miss our goal, we'll still have increased our saving. And that's a great way to start.

Care to join in and make self-denial a social event? Saving money becomes less arduous and more fun if you're not doing it alone. Write to me with any ideas or tales of personal sacrifice and success (or failure). I'll take all the help and advice I can get.

Karl Thiel owns shares of Pfizer. Home Depot, Intel, and Pfizer are Motley Fool Inside Value selections. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2009, at 3:46 PM, pondee619 wrote:

    " paper wealth can be fleeting"

    What are savings, but paper wealth? Cash in the bank, or your mattress, getting eroded by inflation; holdings in Stocks that can crash 50%, or more, in a year; Bonds in a company that can go belly up, or from a government that pays next to nothing in interest; commodities that are only worth what someone else will pay. Paper wealth can be, and often is, fleeting. But that is what savings are made of.

    For ten years I have been saving/investing, regularly, into solid companies. Soon, I'll be even.

  • Report this Comment On September 02, 2009, at 4:57 PM, Fool wrote:

    It certainly can be done. Our current saving rate is 40 - 50% of after tax income.

  • Report this Comment On September 02, 2009, at 5:29 PM, Kangman wrote:

    I have a family of 6 and we have been saving at a rate much greater than 25% for years. Unfortunately we are a society of instant gratification. Everybody wants to live the fast life. The simple life is much less stressful.

  • Report this Comment On September 02, 2009, at 6:17 PM, plange01 wrote:

    save dont save spend dont spend.the US is so confused people just dont what to do ! 9 months into a depression people are just frustrated from the lack of progress being made in the jobs area....obama with his ridiculous health care plan that was slapped together in about a week seems to be more of his trying to be a celebrity than to fix the problems...

  • Report this Comment On September 02, 2009, at 8:57 PM, xetn wrote:

    Savings during the last few years has been a complete loss if you consider the after-tax consequences. You actually lost money (this includes the effects of inflation which is a hidden tax).

  • Report this Comment On September 02, 2009, at 10:34 PM, grendeth wrote:

    I remember an article that came our early during this recession encouraging everyone who has extra cash to spend. To be champions of the recession.

    Bottom line is America culture is not a culture of savings. We have safety nets (or think we do). We want the government to take care of our health care. Unemployment checks.While some of this isn't a bad thing, it has created an atmosphere of entitlement.

    In fact when our government who is leading us into such debt, it has even inflated our spending power. People actually money now can just be printed. The fact that the world is contunuing to hold onto the dollar as a world currency allows us to continue to print money & issue IOU's.

    So to the common folks, why save?. Just issue more IOU's and get into debt. If our President can do it, why can't we?.

  • Report this Comment On September 02, 2009, at 11:04 PM, cle86 wrote:

    A great article on saving can be found in the Weekly Standard magazine called "There is No Paradox of Thrift". http://www.weeklystandard.com/Content/Public/Articles/000/00...

  • Report this Comment On September 03, 2009, at 9:37 AM, drericrasmussen wrote:

    This article buys into the presumption that a rise in the savings rate will "kill" the economy. Yes, an increased rate of savings does have an impact on consumption. But that has positive "knock-on" effects that support future growth. First, increased savings will tend to lower the interest rate relative to what the Fed would have to peg it at. Second, increased savings reduces our reliance on foreign funding of debt. Third, much of our consumption of physical goods is for imports -- money for foreign economies, not the US. Fourth, an increase in savings will tend to boost personal wealth. Over the long term that is a surer footing for a modest rise in spending and steadier growth. The presumption of a direct link between increased saving and slower growth is absurd. China has had a high savings rate for decades. In the early decades it didn't matter because the command economy destroyed the wealth produced. Since 1980 the high savings rate flowed into a wiser allocation of resources --- and a high growth rate resulted.

  • Report this Comment On September 03, 2009, at 11:34 AM, rfaramir wrote:

    The Mises Institute (mises.org) has a lot of articles explaining economics. Frankly, anyone who believes in the "paradox of thrift" does not understand economics.

    One article of many there is this "Is Deleveraging Bad for the Economy?": http://mises.org/story/3064

    Halfway down, it reads: "Once it is realized that saving is real stuff and has nothing to do with money as such, the so-called paradox of thrift turns out to be a logical impossibility."

  • Report this Comment On September 03, 2009, at 1:09 PM, TMFBreakerThiel wrote:

    <i>"This article buys into the presumption that a rise in the savings rate will "kill" the economy. Yes, an increased rate of savings does have an impact on consumption. But that has positive "knock-on" effects that support future growth."</i>

    I agree with this--I was talking about what economists like Paul Krugman tend to say about high savings rates. The comment about me single-handedly killing the economy was facetious. I don't know about a nationwide personal savings rate of 25%, but I think something in the 10%-12% range, though it would have short/intermediate-term ripples through the economy, would be very good for us. For one thing, those savings are going to be somewhere. Even sitting in the bank, they will be invested in the economy.

    -Karl Thiel

  • Report this Comment On September 03, 2009, at 2:13 PM, SamRJ wrote:

    What about the wonderful 6.2% of our income we "save" though Social Security? Add in the employer's 6.2% portion as well, and we are all saving 12.4% of our income already, right (for everyone making less than $102,000/yr)?

    I would be easily set for retirement when it came along if I could be stashing this money away for myself instead of giving it to the government to throw away.

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