In 2005, the U.S. savings rate hit its lowest level since 1933 and entered negative territory. In other words, we weren't saving much. We weren't in a recession at the time, so the pullback wasn't reflecting desperation but instead, perhaps, overconfidence and overspending.
Times have changed, though, and the savings rate has been rising -- it recently approached a much healthier 7%. Some economic thinkers are suggesting that Americans need to save even more. And why is that? Well, once we have socked more and more money into our bank accounts, those banks will have more money to lend out, and that will help lubricate the machinery of our economy. Businesses and people will have an easier time borrowing, and growth will be easier. That, in turn, should boost consumption and help lift us out of our recession.
Another view
That's well and good, but I think that you and I might do better to focus on another reason to save more: Because we need to, to provide for ourselves and our families. Forget about economic theory and how our savings account can reverse a recession. Instead, remember that most of us will be relying on ourselves to save our own retirements.
If you're thinking that your socking away $5,000 per year for 25 years will be enough to provide for your retirement, think again. Even with 10% returns, that would grow to only about $540,000. If you average just 8% growth, it will total almost $400,000. Trying to live on somewhere between $16,000 and $22,000 per year is probably a stretch for most people.
So don't just save to help the overall economy. Take seriously your need to save more and invest more for yourself, and to aim for solid returns. If the economists are right, you'll help the economy, too.
How to get there
Some top-notch mutual funds have admirable long-term records, such as Janus Overseas (JAOSX), with a five-year average of 14% and top holdings that recently included Research In Motion, Corning (NYSE: GLW), and PotashCorp (NYSE: POT).
Or find some outstanding individual stocks. Here are some companies with solid records that sport four- or five-star ratings in our Motley Fool CAPS community of investors, for further research.
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Company
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10-Year Average
|
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Precision Castparts (NYSE: PCP)
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21.1%
|
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Novo Nordisk (NYSE: NVO)
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19.7%
|
|
Agrium (NYSE: AGU)
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16.5%
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China Mobil (NYSE: CHL)
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12.9%
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Flowserve (NYSE: FLS)
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13.2%
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Data: Motley Fool CAPS, Yahoo! Finance.
No matter which direction you go, saving more and investing better is the best path to prosperity. The sooner you start, the better off you'll be in the long run.
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