Broke? So are many Americans, and of those, many are turning to a historically taboo source to break even: savings and investment accounts. Since this is the nest egg for many individuals’ retirements and a source of funds for a rainy day, withdrawing from it is discouraged unless absolutely necessary. So why are so many Americans choosing to do so?
A recent article from The Wall Street Journal reported that Americans have withdrawn a net $311 billion over the past two years. It was the first time in 57 years that Americans withdrew more money in one quarter from savings and investment accounts than they put into them.
The decision of Americans to spend is largely influenced by the Federal Reserve’s efforts to stimulate the economy. It has held interest rates near zero for more than two years, which makes saving practically unprofitable and encourages Americans to spend, thus helping the economy in the short term.
Not to mention that since saving and investing have slim interest rates, many people are deciding instead to pay off credit cards and mortgages that charge much higher rates. Over the two years, ending in September 2010, U.S. consumers managed to eliminate nearly $1 trillion of debt, making them less vulnerable to any future credit shocks that may happen and preventing them from having to continue to pay interest payments on that debt, saving them billions.
In light of that, it is not problematic that Americans have changed course the past few years by not saving and investing like usual. The increased spending has helped the economy and paid off debt, which mitigates the impacts of another economic hit should it occur anytime soon. In particular, college students should see no need to change their habits as a result of the increased spending and decreased saving by their elders.
The article concluded by fretting over the lack of savings, which it said would be detrimental to Americans should there be another recession. It mentioned a statistic that noted that only 35 percent of Americans have enough money in the piggy bank for living expenses to last themselves three months.
It is not good in the sense that many people will not make it on their own for long if they become unemployed, but with the nearly $1 trillion that has been paid off since the recession started, people can focus on those expenses and not be burdened nearly as much by debt payments. Plus, should Americans become unemployed, they are entitled to unemployment compensation for up to 99 weeks 8212; almost two years, which gives workers more than enough time to find a new job and which provides them with cash to get by when they’re not earning a wage.
Americans making net withdrawals from their nest eggs for the first time in over a half century is cause for alarm for some. But with the stimulation to the economy and assistance in paying off high-interest debt, it is something that should be celebrated, not mourned.
For college students, with a long way to go in life, we can also take something from this and realize that while saving and investing are crucial in the long run, spending today can be a better alternative.
Jack Enright is a sophomore economics and political science double major from Tomball.