walkitout (walkitout) wrote,

A Question about "Savings"

I was having a conversation recently with someone who was complaining about a country with a tax on money in savings accounts above a certain amount -- he thought it discouraged savings. Since the country in question is part of the euro zone, I pointed out that there was a much bigger VAT tax, that acts as a brake on consumption. He then noted that people in that country have much less savings than in the US, which made me go, wha? Neither of us had data.

Let's find some data!

First thing to note. NATIONAL SAVINGS RATE WILL NOT ANSWER THIS QUESTION. We want to know about families/households, and the national savings rate includes businesses and governments along with ordinary people, so we don't want that.

Second thing. Typical household net worth data will not answer this question, because typical household net worth data is dominated by home equity. And we are not interested in that. We could argue about whether investment accounts should be included (I would argue not stocks, and not all bonds, but probably money funds and probably Treasuries, T-bills etc., but we could argue about that and I'd stick around and listen). I'm also uncertain whether things like 401K, IRA, etc. should be included. On the one hand, a lot of people borrow against or cash out 401K money. On the other hand, they shouldn't.

Here's my theory. I think that very, very, very tiny numbers of people at any income level in this country could actually lay hands immediately (like with a check or debit card) on a significant fraction (like, 20%) of their annual take home pay -- which in theory, they should be able to do because that's the scale of cash cushion you are supposed to have for emergencies, job loss, etc. I further believe that virtually everyone who cannot do so BELIEVES THEY ARE RARE. That is, 90%+ of the country doesn't have the cash cushion recommended by the financial planning industry, but they _BELIEVE_ that they are some tiny fraction (like 1%) of the country that has failed to prepare for a rainy day. And this "shame" factor is one of the things which impedes tax and transfer programs in the United States.

My theory is probably All Wrong. But I'm gonna go dig around for data before I concede.


"With the exception of the Midwest, all regions experienced decreases in median net worth excluding home equity between 2005 and 2011. For example, in the Northeast, median net worth excluding home equity decreased from $24,658 in 2005 to $20,020 in 2011 (by 19 percent). In the South, it decreased from $14,811 in 2005 to $13,000 in 2011 (by 12 percent). In the West, median net worth excluding home equity decreased from $26,510 in 2005 to $18,518 in 2011 (by 30 percent). Overall, median net worth excluding home equity decreased by 7 percent between 2000 and 2011. However, median net worth excluding home equity increased from $15,546 to $16,942 between 2010 and 2011."

(Everything is in 2011 dollars at that source.)

Assuming that median income is fifty mumble thousand dollars, then this first cut indicates that I am completely wrong! Half the country has half one year's income. On the other hand, these numbers DEFINITELY include 401K, IRA, etc. Basically, the cash cushion is large enough -- but it is _also_ the entire household's retirement savings and, possibly, college savings as well.

ETA: Here's a pretty typical example of the sort of financial advice that is out there.


I _still_ suspect that only a tiny fraction of the population has attained this goal.

An argument that you may not need an emergency savings fund separate from other savings:


The comments thread is, whether they know it or not, arguing about what fraction of their portfolio should be in cash.


"Much of the traditional thinking about cash is well intentioned but unrealistic. Should you have six months of living expenses in the bank for emergencies? Sure. Do you? Probably not. In over 20 years of working in finance, I simply never see that sort of cash cushion among average investors of ordinary means. It is a luxury that only the wealthiest can afford."

That occurs in the context of an explicit discussion of portfolio allocation.

He then goes on to note that very high net worth people are very heavily in cash, still. Dunno what percentages he intends.

"Why the ultra-wealthy have decided to sit in an asset class that loses value by the second with even modest inflation can most likely be explained by psychology."

We don't _have_ modest inflation. We have historically low inflation, bordering on disinflation and deflation with the drop in commodities across the board. Sitting on cash in that environment isn't so crazy, especially if you suck at stock picking, are diversified globally (and thus suffer from actual deflation, not to mention the Cray Cray that has been Russia), or tend towards a sectoral approach that underweights what is currently growing, and won't really show a good return until we are much further along in this cycle. The author, like PUA guys, negs at the rich investors and says it's cuz they are chicken. Bock bock bock.

Then, some data! Which I will be digging down into. But percentages, anyway:

""BlackRock President Rob Kapito noted in a Wall Street Journal interview last month that “on average, more than half of portfolios are in cash, earning negative real returns . . . 48 percent of U.S. respondents’ investible assets are in cash deposit and savings accounts, and an additional 12 percent are in money-market accounts and certificates of deposit.”" Don't know the universe of portfolios in question, but this is BlackRock, so probably not talking about median income people here.

He suggests a bond ladder instead, 3-5 year maturities. In his favor, this dates from 2013. You'd have to be a loon to do that now.

I haven't bothered to check in on what people have to say about cash in a portfolio question in ... a really long time. (For the record, I'm of the opinion that if you _need_ to spend that money in the next 3ish years, it should be in cash. And be careful of the "cash equivalent" you pick. But "need" is obviously negotiable. Do you need to pay your kids college tuition? Probably. Are you retired and do you "need" to eat? Definitely. Do you "need" to buy a house in the next three years? That is tricky. The point where you probably should sell out and go to cash -- a raging bull market, so you are in cash when the housing market crashes and you can buy for cheap -- is not, psychologically, a point where most people can sell. If you owe taxes on a taxable event which has already occurred, you should have paid the taxes already.)


"Cash outside an emergency fund is useful if you have a large liability coming up. For example, your high-school senior is heading off to college and you're footing the bill. Personally, I'm stashing cash this year to pay higher taxes next April."

Here, would be an example of, don't hold that cash. Send it off to the US Treasury (or whichever taxing authority you owe it to). Honestly, I cannot tell you how many people I've known over the years who have gotten confused about whose money it is. If it isn't in your account, it's much less confusing.

Anyway, the experts cover the usual ground: my theory (if you're gonna "need" it in 3-5 years), no cash, so you can buy on dips/because unexpected opportunities come along. A bunch of the advisors think that "opportunities" = "market timing". I'm not sure when stock picking got such a bad rep. It makes me sad. Lots of account specific (is this in a 401K, IRA, or what) advice.

WSJ summarized the results, along with the BlackRock reference, in this article a few months later:


Interestingly: "But BlackRock's survey hinted at another reason for clinging to cash. Among U.S. respondents, the percentage of take-home pay devoted to living costs, bills and debts is particularly high, 49% versus the global average of 40%. Asked what would induce them to invest more of their cash, nearly a third of respondents said "less personal debt."

Oooh, maybe it does have median income people in it. Their second version of this survey claims:

"nationally representative sample of 4,000 Americans, ages 25 to 74"


Worth reading that pdf. Interesting stuff in there, because BlackRock did surveys in 20 countries so they can do meaningful international comparisons on things like costs of daily life.

"This concern is widespread but more acutely felt by women
and Americans in their middle-years (ages 45–54), those who are at the critical
pre-retirement juncture and should be placing the greatest focus on saving
aggressively for their retirement."

So I'm pretty suspicious of the idea that people are really saving or investing 30% of their take home pay. Maybe I just know a lot of spend thrifts. (But I don't think so, because I know a range of people, and 30% is a non-trivial goal to hit.) More worrisome is that the "good saving for retirement" frame leads to statements like 45-54 year olds "are at the critical pre-retirement junction and should be placing the greatest focus on saving aggressively for their retirment". This would seem to completely ignore that a typical person in that age range may well also have to focus on (1) child care costs, (2) saving for kids' education, (3) their own medical issues, (4) the medical issues of parents.

It's easy, once your kids (if any) are launched, to look back and go, gee, I should have saved more for my retirement, and then pass out that advice to young people in your environment. But it has always been an incredibly stupid, short sighted and insulting remark to make. My father focused a lot on his retirement savings -- and my parents choices regarding education, child care, etc. were absolutely reprehensible.

But, hey, at least I don't have to worry about paying for them now, so, yay?

So it turns out that all that massive amount of cash is sitting in checking accounts. Why is this being considered part of anyone's portfolio? I'm now super confused.


I guess if you are making median income, 12K in your checking account _is_ a large fraction of your "portfolio"? Weird place to keep it. . . Altho maybe not. It's insured -- it's not going anywhere. That's not really enough to invest in anything except maybe an index fund. And maybe that _is_ the emergency fund, which is just about right for median income.


So this describes an automated system of moving up to the insured amount around various online accounts based on the current offered interest rate. I _definitely_ remember a financial guy telling me that he and his partner did this kind of thing as a service for some very, very paranoid, old, Asian clients back in the 1990s. I'm pretty sure he charged more than 2 beeps for the service, so, hey, the costs have gone way down! Yay?

The rationale for keeping money in checking (altho not as much as people are accused of keeping):

Tags: economics, our future economy today
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