Wednesday, February 2, 2011

Who saves the most?

Today, while cruising the Dollar Stretcher forums, I ran across a link to an interesting article: "How to Save a Third of Your Income." It's an interview with Kimberly Palmer, the author of a book called “Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.” She says that she saved a third of her income throughout her twenties, mostly because she and her husband "continued living like college students" throughout that period. Now that they have a house and a baby, she says they're only saving about half as much, though she hopes to return to saving a third of their income when their child is older.

One response to the article said, "I think it's an interesting realization that it it is so much easier to save when you are young and don't have liabilities." I'd heard this argument before: Amy Dacyczyn, author of the Tightwad Gazette newsletter and books, claims that of all the money she and her husband managed to save up for a down payment on a house, the largest portion was saved during the first year of their marriage, before they had kids.

I thought this over, and my reaction was "It is an interesting argument...but I'm not sure I buy it." I know for a fact that my husband and I save a much larger percentage of our joint income now than I did when I was young and single, and the reason is obvious: I was making barely enough to live on. After college, it took me 6 months to land my first job, and my starting salary was around $18,000. It took me another six months just to find an apartment that I could afford on that. Once I was out on my own (with two roommates), I always managed to make ends meet, but I didn't save anywhere close to a third of my income. I actually thought I was doing quite well to be saving anything at all.

But today, my husband and I have two incomes, and our expenses, while they're certainly higher than one single person's, are nowhere near as much as two single people would spend living separately. Despite my unpredictable freelance income (a couple of years, I've actually made less money than I did at that first job), we've always been able to live comfortably and still save well over one-third of our combined income. Even with a mortgage and a house to maintain, we still have much more slack in our budget than I had during those early years.

Of course, I had to admit that our situation might not be typical. Our combined income is probably above average, and unlike many couples, we have no kids. (Not as many as you might think, though; as of the 2000 Census, there were more married couples without children than with them. On the other hand, this refers only to children under 18, so the figure also includes empty-nesters whose kids have moved out. Still, it's clear that couples without children are not as rare as some people imagine. But I digress.) So I decided to try and dig up some statistics to answer the question: how do the income and expenses of the average single 20-something compare to those of the average married 30-something with children?

After a little poking around, I found what I wanted at the Bureau of Labor Statistics. These statistics are all from the 2009 Consumer Expenditure Survey, Table 3: "Age of reference person: Average annual expenditures and characteristics." This table compares the expenses of "consumer units" (which translates roughly to "households") based on the age of a "reference person" (that is, one of the heads of the household). In households where the "reference person" is under 25 years old, the average number of children under 18 is 0.4. Since you can't have a fraction of a child, this means that most of the young folks in this group are childless. In these households, the average annual income is $25,695 ($25,522 after taxes), but the average annual expenditures are $28,119. So the average savings for this group is actually negative; the average person in this group lives beyond his/her income.

Contrast this with the average household of 25-to-34-year-olds. These folks have, on average, 1.1 children, and their expenditures are naturally higher: $46,494 a year, on average. But their average income is also much higher: $58,946 before taxes, or $57,239 after taxes. So this household can save an average of $10,745 a year—about 19 percent of their after-tax income. Move up to the 35-to-44-year-old age group, and things look even brighter. The average household in this group has 1.3 children, and their expenditures have gone up to $57,301. But their income is now $77,005 before taxes, or $74,900 after taxes. So they are saving $17,599 a year, or 23 percent of after-tax income.

Now, I'm not trying to argue that any of these "average" households is representative of how much it's possible to save. My own experience, as well as Kimberly Palmer's, shows that some people are able to save much more than these averages, both in their youth and into middle age. But if we look to these statistics for an idea of what's typical, I would have to conclude that while it may be possible to save money as a single person in your early 20s, it's definitely easier when you're older and part of a two-income household—kids or no kids.
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