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Negative Savings Rate

Growing up, it’s more than likely that you’ve been told by multiple people to save your money instead of squandering it. But this piece of advice doesn’t seem to have stuck with many adults between the ages of 18 and 35. Recent reports show that millennials have a negative savings rate of 2%, a trend that is neither sustainable nor financially savvy.

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What Does It Mean to Have a Negative Savings Rate?

The term “negative savings rate” is pretty intuitive. It’s when savings are negative because people are spending more money than they earn.

A negative savings rate on an individual level only affects one person and his or her financial dependents. But when a negative savings rate seems to plague an entire generation, it may be cause for alarm.

The Implications

Negative Savings Rate

A negative savings rate means that while consumers may be pumping plenty of money into the economy, they’re putting themselves at risk of facing a financial disaster that could slow thing down for everyone in the future. Sometimes this may be temporary, like if you have a job with seasonal high and low times. But if this is a persistent state, it may be time to take action personally or as a society. Here are a few situations where having a negative savings rate could spell trouble.

1. Loans

Folks who have a negative savings rate usually have dwindling savings or no savings at all. Thus, they might be forced to look to others to pay for many of their expenses, like their rent or mortgage payments.

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Paying off student loans and other forms of debt can take a while even if you budget and save your money appropriately. Over time, interest on unpaid loans compounds on top of the principal balance. By not saving properly and taking on more and more debt, you could end up in a debt spiral that seems inescapable.

2. Emergencies

While your stream of income may cover your day-to-day expenses, what happens when you encounter an unexpected cost such as a trip to the emergency room? If you have no savings (often referred to as an emergency fund) to dip into, you could be forced to cut down on daily purchases like food expenses to foot the bill.

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3. Debt

A negative savings rate means one of two things. You’re either digging yourself deeper into debt or you’re dipping into your existing savings and increasing your chances of eventually going into debt. What’s more, this sort of lifestyle can make goals such as saving for retirement difficult or even impossible to achieve.

The Bottom Line

Negative Savings Rate

Having a negative savings rate is both risky and unsustainable. While it’s tempting to spend all the money you make, it’s more important to strive for financial security.

By building up savings, you’ll be better off in the long run. Keep in mind that having low savings is one thing, but having negative savings is an entirely different and more dangerous ballgame.

Related Article: 6 Smart Retirement Savings Moves for Millennials

Photo Credit: © iStock.com/Kontrec, © iStock.com/Todor Tsvetkov, © iStock.com/Squaredpixels

Amelia Xu Amelia Xu has a degree in Economics from Princeton University. She is an expert in investing and taxes. Amelia is a Long Island native.
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