Household savings rate
Over the next few articles, we shall explore some figures from the most recent national accounts, published on the Office for National Statistics website on 28th March 2014.
The key findings of the report have been noted as follows:
- UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.7% between Q3 2013 and Q4 2013.
- GDP is estimated to have increased by 1.7% in 2013, compared with 2012.
- Between Q4 2012 and Q4 2013 GDP in volume terms increased by 2.7%.
- The households’ saving ratio was estimated to be 5.1% in 2013, compared with 7.3% in 2012.
- GDP in current prices was estimated to have increased by 1.6% between Q3 2013 and Q4 2013.
There are some interesting points in the headlines, and even more in the detail therein. Today, we shall focus on one of the headline points and what this means for the UK and, more importantly, what it means for me and you.
The households’ saving ratio was estimated to be 5.1% in 2013, compared with 7.3% in 2012.
What is the household savings rate?
Financial advice from personal finance experts, gurus, bloggers and anyone else who cares is “pay yourself first”. This involves taking a proportion of your household income and putting it towards savings. This percentage saved is essentially your household savings rate. In general, this is recommended to be a minimum of 10%.
We are not managing this!
It is clear to see in the statistics from surveys held regarding the number of people who live pay-check to pay-check. However, even more explicitly, there are some figures hidden within the nation’s quarterly accounts which show the household savings rate.
In the most recent quarterly accounts (Q4 2013), we can see that the savings rate in Q4 2013 was 5.0%. This shows a downward trend since 2010 levels which were consistently between 7-8%.
Therefore, in Q4 2013, we are on average saving half of the minimum recommended in most text books on personal finance.
How does this compare looking further back? Since ONS data began on this subject in 1987, we can see an interesting trend:
In the years leading up to financial crises, the household savings rate tumble. This happened between 1987 and 1989 (where savings rates were around 4%), between 1992 and 2000 (where savings rates fell from 11% down to 5%) and again between 2001 and 2008 (where savings rates fell from 6% down to 2%).
For me, this is remarkable and completely counter-intuitive. It seems that, in times of hardship and economic difficulty (1991, 2000/1 and 2009) and those years directly afterwards, UK households are actually saving more of their income that they do in the good times.
Conversely, strong economic periods (and bubbles) are characterized by significant and consistent spending, leading to a decline in savings rates.
What does this mean for me?
Firstly, you are maybe not saving enough right now. 2013 savings rates were 5.1%; compared to 7.3% in 2012.
Let’s have a look at what happens if the average UK household (assuming annual household income of £40,000) saves 5.1% (2013 rate) vs 7.3% (2012 rate) vs 10% (recommended minimum rate). This assumes 8% annual growth on savings.
|
|
5.10% |
7.30% |
10.00% |
|
5 years |
11,967.87 |
17,130.47 |
23,466.40 |
|
10 years |
29,552.59 |
42,300.76 |
57,946.25 |
|
15 years |
55,390.31 |
79,284.17 |
108,608.46 |
|
20 years |
93,354.41 |
133,624.94 |
183,047.86 |
|
25 years |
149,136.12 |
213,469.34 |
292,423.76 |
|
40 years |
528,475.30 |
756,445.03 |
1,036,226.07 |
|
50 years |
1,170,491.12 |
1,675,408.86 |
2,295,080.63 |
Therefore, the average household would be over £1m better off after 50 years of saving if they can maintain a 10% savings rate, rather than the average saving rate achieved by UK households in 2013.
And what can I do about it?
Simple, just follow one simple action point:
Make a budget and cut back on expenses where you can. If you can achieve a 10% (or preferably higher) savings rate, you will be very grateful to your former self in future years.
In the next article from this series, we shall explore the change in real households’ disposable income in Q4 2013 and historical comparisons.
I think it makes perfect sense. Right before a crash, everyone is levered up to the hilt with debt. A reset is needed every once in a while to clear out all the bad debt so the game can go onto the next round, and folks can start borrowing again 🙂
I think this just shows that the general public is falling back into their lazy habit of not budgeting and saving enough. During the midst of the recession, people probably became much more aware of their financial situation and were afraid to lose their job or income. They started saving more in case of an emergency. Now that things are picking up and maybe seem rosier, it’s easy to just fall back into old habits. I think the solution to this is to make saving fun. Turn it into a game to see how much of your income you can save and how where you can cut back on expenses.