Why Are Americans So Bad at Saving Money?
The economy is doing better, but Americans still aren’t saving enough money. Here’s why.
Last week, the Federal Reserve Board issued its annual report on the economic well-being of American households. The report was largely positive: Seventy-five percent of adults said they are “either doing okay or living comfortably,” a 12-point increase over 2013.
But there’s one glaring piece of bad news in the report, a vulnerability that continues to plague Americans: They’re just not very good at saving money.
Twenty-seven percent of Americans surveyed reported they would have to borrow money or sell a possession if faced with a $400 unexpected expense; 12% wouldn’t be able to cover the expense at all. Perhaps even more jarring, only 36% of adults think they’re on track to save enough money for retirement; 25% had no retirement savings at all.
While it’s no surprise that low-income families are lacking in savings — data suggests that the median savings of households in the bottom 20% of the income distribution is $0 — households across the income spectrum report themselves as ill-equipped to deal with financial emergencies. A 2015 report from the Pew Research Center noted that 25% of families earning more than $85,000 a year struggled financially after an unpredicted financial hardship
In recent years, psychologists and economists have identified a number of reasons why so many people struggle to save money. The most significant culprit is what’s known as “present-bias” — that is, an unwillingness to delay a present gratification (say, eating out) in order to achieve a future gain (a fatter savings account), despite having reported a willingness to do so in the past.
“When people make plans for the future, they think giving up some money and putting it in a savings account is a good idea because they’re going to earn interest and use that money to retire,” says Stephan Meier, a professor at Columbia Business School. “But then when tomorrow or next week becomes today, actually the cost of doing that is just too high for people.”
Meier’s research has found that people who are especially present-biased have higher credit card debt, even after controlling…