Source: Flickr user Justin.

The fact that the United States is an economic superpower is beyond dispute.

There are a number of things Americans simply do really, really well compared to the rest of the world. The US is leading the world in high-technology products, its the leading stomping ground for corporate investors, its home to the worlds most followed stock exchanges, and it lays claim to 17 of the worlds top 20 universities, according to a survey by Jaotong University.

Where the US falls far short
But, for all of the United States glory, we really, really stink when it comes to saving money.

According to data from the US Department of Commerce found at the St. Louis Federal Reserve, the July personal savings rate was just 5.7%, up 0.3% from the 5.4% savings rate reported in May. Admittedly, this is considerably higher than the sub-2% savings rate of nine years ago, implying that consumers are being a bit more prudent with their paychecks lately.

US personal savings rate. Source: St. Louis Federal Reserve. 

Yet US savings rates are abysmal on a historical basis. Between 1999 and 2008 the Eurozone countries averaged an 8.93% household savings rate. Over that same time span, American households managed to sock away just 2.83%!

This lack of savings is a potentially huge problem because it could 1) put families at a severe disadvantage if the economy dips into recession and they have no emergency savings to fall back on, and 2) hamper peoples ability to retire on their own terms. Generally speaking, the earlier you start investing, the more you can use the power of compounding gains to your advantage. Individuals and families who arent saving are potentially leaving huge long-term investment gains on the table.

Saving money: 40% of the nation is doing it wrong
This leads us to Bankrates recently released monthly personal-finances report, the Financial Security Index. For the month of August, Bankrate surveyed 1,003 people and asked them at what age they began saving for their retirement. As you can see below the results were all over the place.

Graph by author. Data Source: Bankrate August Financial Security Index.

Although Bankrate highlighted the fact that college graduates were more than twice as likely to begin saving for retirement in their 20s as people without a college degree, I think the much bigger highlight is the cumulative 41% of respondents who havent started saving, never plan to retire, or started saving in their 50s or 60s.

Using Bankrates return-on-investment calculator, I created the following hypothetical but reasonable scenario to show the power of saving as early as possible:

  • All persons start with an initial investment of $0.
  • All persons contribute $1,200 annually to their investment portfolio ($100/month).
  • The annual rate of return on their portfolio is 7%, which is fairly conservative relative to the stock markets long-term gains.
  • All persons pay a tax rate of 15%.
  • All persons retire at age 66, currently considered the full retirement age by the Social Security Administration.

Under this scenario I ran return-on-investment calculations for people who began investing at the ages of 20, 30, 40, 50, and 60. Here are the results: