The Average American’s Savings Balance Might Shock You

The Average American’s Savings Balance Might Shock You

The Average American's Savings Balance Might Shock You
Reading Time: 5 minutes

A study by the Federal Reserve revealed that about half of the US population would be unable to raise $400 to cover an emergency. Many other studies paint a similarly bleak picture of Americans’ saving habits, highlighting how millions of households live on the razor’s edge of the poverty line, probably one emergency away from financial ruin.

To avoid going into debt in the event of family or personal emergencies, you should know how much to save and where to hold your savings. Here, MoneyWizard.co explores all the savings options available to you. Click through to read more.

How Much Does The Average American Have In Savings?

Only about 15% of Americans save enough, with one in five individuals saving nothing. This translates to 4 in 5 people living without a safety net to cushion them in case of unplanned expenses like medical costs, car or home repairs, sudden moving expenses, and other emergencies. Such individuals are far from financial security, unable to save for meaningful purchases, such as a house, or maintain enough reserve to avoid falling into debt.

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According to the Federal Reserve, as of 2019, American households had a median account balance of only $5,300, while the average balance stood at a whopping $41,700. Clearly, there’s a huge gap between median and average balances. Just as the top 1% globally control half of the world’s wealth, in the US, the top 1% hold approximately 38.5% of the country’s wealth. The rich have a lot of money saved, raising the average balance. Thus, the median balance provides a more accurate approximation of how much the average American saves.

How Much Does The Average American Save Per Year?

How much you save annually depends on several factors, some of which can either motivate or discourage you. For instance, setting a realistic savings goal can make you excited about saving by providing a reward for setting money aside. This could include buying a new vehicle, purchasing a bigger home, or paying for a dream vacation and checking it off your bucket list.

Attractive interest rates can also encourage you to save. When your savings earn good returns, you become passionate about it. Income level, age, inflation, and a variety of other factors may also influence your decision to save. The average American saves for retirement, emergencies, and other things, including vacations, children’s education, weddings, home purchases, and scheduled repairs. Saving for these helps secure your financial future.

The level of savings among American households differs vastly based on income level and other circumstances. A wealthy household has the luxury of saving more than the recommended 20%, while individuals with less income can barely set aside 10% of their take-home income. As such, it is difficult to correctly estimate how much the average American saves each year.

According to data backed by the US Bureau of Labor Statistics, in 2018, the typical American worker earned about $67,241 and spent about $61,224 of that. The difference, $6,071, is assumed to be money saved, although there’s no way to prove this. During the same year, the Federal Reserve reported that the average savings balance for the typical American was approximately $33,766. While this is correct on paper, it isn’t the reality if the median balance of $5,200 for the same period is considered.

Of course, the numbers have changed drastically over the years. For instance, according to a report by the Planning & Progress Study, the average balance saved by the typical American was estimated at $41,700 in 2019, and $61,900 in 2020.

Age and Savings

As mentioned above, age is a critical factor influencing one’s saving habits. Consumer expenditure surveys often report how much savings individuals at different age brackets have. While many households live below their means, which is a good sign, the amount saved varies widely by age. Americans under 25 and those over 75 are perhaps the only groups that spend more than they earn.

At 25, individuals are likely earning an entry-level salary, spending more than half their income on rent, while paying off massive student loans, leaving nothing for savings. It is common for Americans in this age bracket to accumulate credit card debt, and have little saved for the future. Meanwhile, those in their seventies are well into retirement and probably living off retirement benefits with no extra income. At 70, it is inevitable to spend more than you earn.

Recent consumer surveys indicate that adults under 25 save only 4% of their pre-tax income. MoneyWizard.co has established that the typical American between 25 and 34 fares much better at 19%. The numbers also vary based on marital status and dependents. Singles with children save the least, while childless couples save the most, followed by couples with children.

Americans between 35 and 44 save 23% of pre-tax income. In this age group, singles with children save the least, followed by singles without children, couples without children, and finally, couples with children saving the highest amount. Adults between 45 and 54 set aside 27% of their income. In this age bracket, couples with children tower over singles without children, singles with children, and couples without children.

Between 55 and 64, the rate of savings declines to 22%. Individuals in this bracket are approaching retirement, their kids have probably graduated college, and children’s welfare is no longer a motivation to save. Still, couples with children maintain the lead, followed by couples without children, singles without children, and lastly, singles with children. At 64 to 75, the rate plunges to 8%, and 5% for adults over 75.

Where Should You Save?

There are several savings accounts you can use to grow your wealth. All accounts have set regulations, including tax guidelines, contribution limits, and investment options, among others. Here, the experts at MoneyWizard.co narrow the choices down to the three most popular options to consider, depending on your personal needs and preferences.

Highly recommended options include:

1. Roth IRA

The Roth IRA is a popular Individual Retirement Account offering tax-free growth and withdrawals in retirement. With a Roth IRA, federal taxes are paid on contributions, and unlike other savings plans, transfers and withdrawals are tax-free. The Roth IRA also lets you withdraw savings at any time without a penalty, making it ideal for both long- and short-term savings.

There’s no age limit for opening a Roth IRA account, no employer-plan restriction, and no taxes when you transfer savings to beneficiaries. The Roth IRA, named after Senator William Roth, allows individuals to make regular contributions to the account, which they can use to invest in stocks, bonds, and mutual funds, among other investment vehicles.

To encourage Americans to save through this plan, a tax incentive was implemented. To prevent abuse of the incentive, an annual contribution limit was set. For those aged 50 or older, the limit was set at $6,000 in 2020 and $7,000 in 2021.

2. 401(k)

A 401(k) is a tax-efficient, defined-distribution, employer-sponsored retirement plan. Workers contribute regularly to the accounts, and some employers match contributions. Investment earnings are not taxed until the employee withdraws the money in retirement, unlike a Roth IRA where withdrawals are tax-free since contributions were already taxed.

401(k) contributions are taken from your paycheck before federal tax is imposed, thus lowering your taxable income. You can also choose how much to contribute and start contributing as early as you like.

3. High-Interest Savings Accounts (HISAs)

Available through online financial service providers and traditional financial institutions, HISAs offer higher rates on deposits compared to conventional checking accounts. This means your contributions can earn better returns than those of traditional savings accounts. Besides the attractive interest rates, HISAs levy little to no fees on transactions.

HISAs are safe as long as your financial provider adheres to FDIC or NCUA guidelines. Therefore, when searching for HISAs, it is advisable to consider their annual interest rate, how often the rates change, the minimum deposit required, and the minimum balance required.

Why are Americans Poor at Saving?

Financial pundits have debated the cause of declining savings rates over the years among average Americans. Some believe Americans stopped saving when income stopped growing. Case in point: individual savings peaked between 1960 and 1973, around the time per capita income spiked by 3.2%. Others observed that around the late 1990s, the middle-class took on a lot of debt to buy homes. Hefty mortgages stretched buyers thin, leaving little for savings.

While both explanations have merit, it is difficult to pinpoint the exact cause of the decline. Perhaps retirement policies were too good for anyone to save more on the side. In any case, people continue to save and the numbers are not as bad as you might think.

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