Recession has people saving more

PERSONAL FINANCE

March 08, 2009|By EILEEN AMBROSE

Every once in a while, you hear a story like the one recently about the librarian who left more than $650,000 to the Enoch Pratt Free Library in her will - more money than she earned during her entire career there.

It makes you wonder: Why are some of us great savers despite modest incomes, while others are living paycheck to paycheck even with healthy salaries? And could this recession spur a new generation or two to become avid savers, as the Depression did before?

The recession is already having an impact. Government figures released last week showed that the personal savings rate in January rose to 5 percent, a level not seen for 14 years. Only a few years ago, the savings rate was briefly negative.

"Americans used to save money once upon a time," says David Wyss, chief economist with Standard & Poor's. "From 1950 to 1990, it averaged almost 9 percent."

That started changing 25 years or so ago, says Christopher Carroll, an economics professor at the Johns Hopkins University. "Mainly, it got easier to borrow," he says.

With the growing use of credit scores, lenders that didn't know us could quickly assess our risk as a customer and adjust interest rates accordingly, Carroll says. "That sort of made borrowing available to people who couldn't borrow before."

Still, not everyone jumped on the borrowing bandwagon.

The Baltimore librarian, Sara Siebert, had inherited stock from her parents, but through frugality and prudent investing over time, her nest egg grew many times over, says her attorney, Julian Lapides. "She didn't like to waste money."

By the time the 88-year-old died last year, her estate was worth more than $2 million.

Lapides says some people seem to have a savings gene and that stories like Siebert's aren't as rare as we think. He has had other clients, librarians and teachers who live frugally and leave estates worth more than $1 million. "There are lots of hidden millionaires amid Marylanders," he says.

Matt Wallaert, a behavioral psychologist with the financial site Thrive, says saving is something that can be learned. He speaks with thousands of young people each year, and those who do a good job with their money tell him they learned it from their parents.

That means if you're not a natural-born saver, there's hope you can learn to be one.

David Bruce of Baltimore says he thought he knew how to save until last year, when he attended Maryland Saves, part of a national program to encourage savings.

"They made me review how I spend my money every week," says the 49-year-old catering supervisor. He discovered he spent $1,500 a year on cigarettes and wasted money eating out. He has since given up smoking and cooks more at home. Last year, he saved about $1,200, and this year he expects to double that.

"No more name-brand tennis shoes to keep up with the Joneses," he says.

Saving becomes easier, he says, if you remember why you are doing it. His goal: a down payment on a house.

As Bruce shows, it's never too late to become a saver.

The easiest way to do so is to make savings automatic, such as having money taken directly out of your paycheck and transferred to a retirement or savings account.

Setting goals also helps turn saving into a habit, Wallaert says.

Some economists say the recent surge in savings isn't likely to retreat any time soon. "I don't think we can go back to negative savings rates," says Hopkins' Carroll. "We borrowed more than we can pay back."

Of course, if we all suddenly become super-savers, it could stymie the economy's recovery and future growth. But don't worry about that, says Dallas Salisbury, president of the Employee Benefit Research Institute.

"To put yourself financially at risk because 'it's good for the macro economy' doesn't seem to make a whole lot of sense," he says.

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