Financial Optimism Linked to Consistency of Savings

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo of Stacy Clark-Warren by Roadell Hickman

You don't need a big bank account to feel financially secure.

Rather, it's the ability to save regularly even a little that makes you feel optimistic about your financial future, research shows.

"Even people that didn't have a large balance in their savings and investments the fact that they were putting away money every month had a huge impact in how secure they felt," said Marty Durbin, president of First Command Financial Services in Fort Worth, Texas, which released a two-year study of over 9,300 families' savings habits and beliefs.

"When they have that feeling of financial security, it's a positive feedback mechanism that psychologically encourages them to do more," Durbin said.

In the last decade, the U.S. savings rate already low compared with most other developed countries has plummeted further. Americans saved 0.5 percent of their disposable income last year, down from 4.3 percent in 1998, according to data from the federal Bureau of Economic Analysis. The savings rate even dipped below zero in the third quarter of 2005, meaning people spent more than they earned.

People with low or moderate income are inclined to be pessimistic about their ability to save money, said Stephen Brobeck, executive director of the Consumer Federation of America.

But by setting and achieving one small savings goal, you get motivated to tackle bigger ones. "Just as important as savings is the hope," Brobeck said.

That's what happened to Stacy Clark-Warren, 44, a program analyst for the Cleveland Metropolitan School District.

Clark-Warren started saving with $25 automatically taken from each paycheck $50 a month. Pretty soon, she had accumulated enough so that when her daughter's graduation came up, she could say yes to extra expenses.

"It's depressing when your child comes to you and you really don't have it," she said.

To save, she had to change her spending habits. She no longer carries credit cards and she brown-bags her lunch. Sometimes she and her colleagues will pool their lunches to make a buffet.

"No dollar amount can make you comfortable," Clark-Warren said. "It's the feeling of knowing you can put away a little bit."

Saving is even more important now, with the economy in the dumps. Family incomes have become more unstable since the 1970s, so one financial emergency can really be a disaster.

"Many of the kinds of economic strains that were faced by the working poor are now part and parcel of middle-class economic life," said Jacob S. Hacker, a Yale University political science professor and author of "The Great Risk Shift."

In one of the few studies to follow a large number of families over time, Hacker and Elisabeth Jacobs, a guest scholar at the Brookings Institution, found the volatility of family incomes has doubled since 1973.

"These two periods of recession in the early '90s and early 2000s have really depleted people's financial standing," Hacker said. In the first recession, many families drained their 401(k) accounts, and in the second they tapped their home equity, leaving them with few remaining resources.

The First Command savings study found that families with the least money in the bank got the biggest lift from increased saving.

In the group with the smallest balance, 57 percent of the quartile that saves most each month feels optimistic about the financial future, versus 28 percent of those in the bottom quartile. Survey respondents with the most savings showed a smaller boost from increased savings: 40 percent of the top quartile and 24 percent of the bottom quartile felt financially optimistic.

Indeed, sometimes the more income you have, the more you feel encouraged to spend.

"The time when I was doing very well and I was spending money very easily, I didn't like that feeling," said Robert Wolf, 50, of Clifton, N.J. "You think that's a really good feeling but it's not because I didn't have proper boundaries."

Because Wolf helps run a family business in Long Island City, N.Y., his income can vary wildly month to month. That makes it hard to budget.

"Most of the time I find that I have spent about what I'm making," he said. "If you make a lot of money, without realizing it you can spend a lot of money."

Betsy Teutsch, 55, and her husband were doing well financially when they decided to leave New York City for the Philadelphia area.

"I had concluded that if we lived in New York, we would be constantly measuring ourselves by these financial and status yardsticks that we didn't really resonate with," Teutsch said. "If everybody is talking about your weekend house, you have to explain, `I don't want a weekend house.' We concluded it would make sense to live in a place that was less financially competitive."

By living beneath their means, they were able to send their two children to private secondary schools, camps and colleges.

"We were very careful to not escalate our overhead," she said. "The challenge is not to accelerate one's lifestyle when one's income accelerates."

The savings cushion came in handy after a recent car accident. Teutsch was able to replace the car and miss a few days of work without a financial crisis.

But she agreed that what matters is not the size of the savings, but that you put something away: "You can feel rich and secure with a very small surplus."

This article was originally published by Newhouse News Service on Thursday, June 26, 2008.