Can We Save as Much as the Chinese?

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.

*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.