As we move toward a cashless society, money becomes an abstraction and the concept of money as a tangible asset gets lost. —Barbara Whitehead, Center for Thrift and Generosity
When Kevin and Steffani Raff were finally ready to remodel their 37-year-old kitchen in Pleasant Grove, Utah, they did it with years of hard-fought savings.
"Steffani was putting something aside every month over several years," Kevin said, who admits he doesn't know the details, as she handles the books. A 40-year old father of five, Kevin supports his family on his modest income as a social worker with the Veteran's Administration.
In waiting years to remodel their kitchen with cash in 2010, the Raffs ignored waves of advertisements from banks and credit unions urging them to refinance and "cash out" their equity.
By saving rather than borrowing for the remodeling, they also bucked a nationwide trend that began in the 1980s: a sharp nosedive in the "personal savings rate."
Measured by the U.S. Bureau of Economic Analysis, the personal savings rate is the nationwide difference between after-tax income and consumption. Any money not spent is considered "saved," including money spent paying down debt. That rate dropped precipitously from more than 12 percent in 1981 to just 1 percent in 2005.
The free fall of savings has many economists and personal finance experts concerned at both micro and macro levels. At the family level, they argue, insolvent individuals are exposed to economic shocks. At the national level, depleted savings are unavailable to fuel business investment and government infrastructure, leading to unsustainable reliance on foreign cash, especially from China.
As of March 2011, foreign investors owned more than 53 percent of privately held U.S. debt, up from 35 percent in March 2001. Concerned with spiraling U.S. deficit spending, China reduced its U.S. securities in 2011 — the first time since the Treasury department began tracking the data in 2001.
Many economists view the long-term implications at both the micro and macro levels as troubling.
"Take a look at the share of U.S. GDP devoted to consumption over the past 40 years," said Barry Bosworth, a senior fellow at the Brookings Institution. "It just steadily goes up during this period. We just became a consumption society. We consumed all of our income, and if we ran short, we got the rest from overseas."
Consumed with consumption
"A lot of the problems we face as individuals and as a society can be traced to this overemphasis on consumption," Bosworth said. "Look at the number of Americans who are fundamentally living way beyond their means."
The data, collected consistently since 1930, show a remarkable shift beginning in the mid-1980s. Prior to 1984, the savings rate held steady for decades, though it dipped during the Great Depression and rose sharply during WWII, when there was little to buy besides war bonds.
The rate dipped briefly again after WWII, reflecting pent-up demand. Then it rose steadily until 1984, at which point Americans were saving 10.2 percent of their income.
From that point, personal savings dropped sharply — both during recessions and during booms — ultimately settling between 2 percent and 3 percent, with brief drops to 1 percent or below. The rate recovered slightly after the 2008 crash but was still well short of historic norms and recently dipped again.
Some of the shift away from savings may be a consequence of dual income households, Bosworth believes. Whereas in 1969 both spouses worked full-time in about 24 percent of married couples between the ages of 24 and 54, by 1998 both were working in 43 percent of households, according the Bureau of Labor Statistics.
"People think, instead of having a savings account, I'll have a spouse. But they don't anticipate that their spouse may lose her job, too," Bosworth said.
Bosworth sees a similar casualness about savings in the ease with which many enter home ownership with little down payment. Bosworth says European norms are still between 20 percent and 30 percent down, while a typical American down payment might be 5 percent or less. With little equity to spare, thousands of American homeowners were vulnerable to the sudden collapse of housing values after 2008.
Beyond the household, Bosworth points to shifts in broader social attitudes that share the same troubling roots, beginning with skyrocketing public debt. Federal debt held by the public, which stood at 26 percent of GDP in 1980, is projected to reach 76 percent of GDP by 2016, according the White House Office of Management and Budget.
Americans, Bosworth argues, "think they can get along with never having to pay for their government services, that the Chinese will pay forever. And it's not going to work."
A Democrat and an economic adviser in both the Lyndon Johnson and Jimmy Carter administrations, Bosworth is no small-government fiscal warrior. But he fears that the culture of present consumption has undercut vital investments in the future, such as infrastructure and education.
"If you had asked 25 years ago why Americans were so wealthy, a big part of the explanation would be that they were highly educated and highly skilled," he said. "We don't pay for the educational system anymore. The highly educated people come here from other countries, and Americans have a declining level of education."
Where Bosworth's view of American debt culture captures a big picture with lots of macro pieces, Barbara Whitehead's focus is literally on the streets. She recently returned home from Philadelphia, where she spent four days teaching 20 teachers how to teach thrift to high school students.
A historian by training, Whitehead is the director of the Center for Thrift and Generosity at the Institute of American Values, which began its work back in 2005 — before the crash and the rediscovery that real estate and mutual funds could not be counted on to sustain unbridled consumption.
Whitehead focuses heavily on rainy day funds. Early on, when she was promoting her center's 2008 report "For a New Thrift" around the country, she said callers on radio shows would scoff at the low interest rate for savings accounts.
"These were people who were thinking about their mutual funds and equities of various kinds," she said. "But my point was that for people who don't even have so much as a rainy day fund, the interest rate is not the key. The key is to have the fund. That keeps you from the payday lender, keeps you from borrowing on your credit card."
The focus on interest rates rather than on emergency funds, Whitehead said, "creates a kind of pessimism, a ready made excuse to not save."
"With all the talk about the financial crisis and the job crisis," Whitehead observed, "we have not heard too much about the need for people to save. In fact, in some cases people have decried savings. What we are supposed to do is spend to get us out of this sluggish economy."
Whitehead finds herself bucking against a culture in which, she notes, "it is not OK to drive a 12 year old car or have modest furnishings. There is pressure to consume and to remain competitive with your peers. It takes a lot of intestinal fortitude to resist that.
"We need more messages that this is a good thing to do, and not something that is hard and out of the cultural mainstream," Whitehead said.
A thrift agenda
Part of Whitehead's agenda is to change how young people relate to money. In Philadelphia, she said, she learned that when kids go through the cafeteria line at school, some literally dump money into the trash off their tray.
"As we move toward a cashless society, money becomes an abstraction and the concept of money as a tangible asset gets lost," Whitehead said. "It's no longer something you can hold in your hand, or lay out on a table or put in a piggy bank."
In a modern world, Whitehead said, money "has become more high concept and requires a more rigorous, conceptualized form of discipline — a high level of future mindedness, where things happen in your mind, and not in a tangible way."
"That makes it harder for people who have less education and for kids who, at least in the beginning, are somewhat literal," she added.
Beyond public education, the 2008 report also advocates curtailing "anti-thrift" institutions by reining in exploitative payday lending and state lotteries and by creating incentives for low-income consumers to save for emergencies.
Whitehead is cautiously optimistic about changing cultural values around spending and saving. "We've done it with recycling. It's now embarrassing if you throw things away in a casual and wasteful way. We've done it (with) smoking. We now have strong messages against overconsumption of food that leads to obesity."
At the beginning of the 20th century, Whitehead noted, a wide array of institutions from the YMCA to the National Education Association banded together to encourage savings. It would take "a broad social activism, or some kind of public-private partnership to accomplish this," she said.
A step ahead
Back in Pleasant Grove, the Raffs are at least a step ahead of most consumers in their tax bracket. While they have no permanent emergency fund, they do live on the previous month's income and save and pay cash for major purchases.
Yet the Raffs do not view themselves as models of frugality. "Ideally, we would probably only spend a portion of what we saved, rather than starting over each time," Kevin said.
But in a sense, that's exactly what they did. By saving for the kitchen remodel rather than drawing equity out of their home, they kept that resource on hand — unlike the thousands who maxed out ephemeral equity during the boom and were then upside-down after the crash.
This summer, they are building a new home in Saratoga Springs, and their current home is on the market. The equity they spared will be plowed into the down payment.
In the meantime, they are building more sweat equity by doing much of the detail work on their new home. This week, they laid the wood floors.
Why are the Raffs different? Kevin thinks they may have acquired debt antibodies in their youth. Both Kevin and Steffani came from modest backgrounds.
"There was always enough when we were kids," he said, "but we grew up needing to carefully use what we had."
They also learned by observing some hard lessons from a distance. "When we were first married, we watched several families that we really admired getting in over their heads," Kevin said.
This summer they came back from a family vacation hooked on kayaks. "Come check with us in a couple of years and we'll go kayaking together," they told their friends. Right now, they are saving for that down payment.