You're Not Spending, and That's a Good Thing

Editors' pick: Originally published Nov. 1.

Retailers don't like to hear that average U.S. consumer is limiting his monthly spending, but it's great news for those consumers.

According to a Princeton Survey Research Associates International survey conducted for Bankrate in early October, nearly 2-in-3 Americans are limiting their monthly spending. That's good news, but it gets better: 30% are doing so to save more money. While 25% are doing so because of stagnant income, 15% are because of worries about the economy 10% are because they have too much debt and 3% are because they're worried about their job, that savings figure is the best news to come out of this survey since the recession.

"With pay raises now spreading out among the broad population, Americans are finally limiting spending for a good purpose - to save money," says Greg McBride, Bankrate's chief financial analyst. "This is the first time in four years that the top reason wasn't stagnant income."

That's not to say that saving is people's only concern. The University of Michigan's Consumer Sentiment Index hit its lowest point since 2014 in October, with more than half of consumers worried that an economic downturn is coming within the next five years. The Conference Board's Consumer Confidence also declined in October, though both noted that uncertainty brought on by the election wasn't helping.

"Objectively, the probability of a downturn during the next five years is far from zero - this would be the longest expansion in 150 years if it lasted just over half of the five year horizon," says Richard Curtin, chief economist for the University of Michigan's Surveys of Consumers. "Nonetheless, the October rise may simply reflect a temporary bout of uncertainty caused by the election."

Quite frankly, it's about time U.S. consumers started saving: the debt ledger is starting to look fairly red. According to the Federal Reserve Bank of New York, total student loan debt reached $1.26 trillion by the end of June. That's up $69 billion from a year earlier and is the second largest pile of U.S. consumer debt behind mortgage debt (at $8.36 trillion, up $246 billion from a year ago). More than one in ten (11.1%) student loans are past due. That's a worse delinquency rate that for credit card bills, of which 7.2% are past due.

The average 2016 college graduate is carrying $37,172 in student loan debt, according to college and scholarship site Cappex. That's up 6% from last year, with debt carried by 70.1% of all graduates. That's also up from $12,759 two decades ago, when just 54% of all students graduated with debt. The folks at DealNews note that 37% of the Millennials they surveyed were carrying student loans, while 63% are not. While 34% owed less than $10,000 and only 6% owed $40,000 to $50,000, that's still a whole lot in the middle. Just 33% pay more than the monthly amount due, while 20% do the same when they can.

There isn't great news about your credit card bills, either. The FRBNY found that consumers had compiled $729 billion in credit card debt by the end of June. That's up $17 billion from the same time last year, with roughly 7% of that debt past due. As credit card site CardHub noted earlier this year, the average household with credit card debt now owes $7,879 -- or just $500 less than CardHub considers unsustainable for a median household income of little less than $52,000. Finance site NerdWallet compiled its American Household Credit Card Debt Statistics Study last year and found that the average household is paying $6,274 in interest alone year, which means that 9% of average household income ($72,641) is being spent just on interest. Meanwhile, the average American household with credit card debt is facing 44 years of payments if they make only the minimum payment on their debt each month.

That's before you factor in auto loans, which stand at $1.1 trillion. That's $97 billion more than it was a year ago and is the second-fastest-growing portion of consumer debt behind only the $246 billion increase in mortgage debt from 2015 that brought the nation's mortgage tab to $8.36 trillion. Auto loan debt is now perilously close to the total amount of U.S. student loan debt and is nearly $400 billion more than the nation's $726 billion credit card debt. The 3.5% of auto loans that are past due are more than the 1.8% of mortgages that are behind on their payments and is up from 3.2% in 2014 and just 2.2% in pre-recession 2006. It also doesn't help that 22% of all car loans fall into the "subprime" category of borrowers with credit scores of 620 or less.

"Growth rates continue at unsustainable levels," said Nick Clements, former banker turned consumer advocate and founder of personal finance advice site MagnifyMoney. "Too much risk is being taken, and defaults will be coming."

Even new auto loans at credit unions a have jumped 15.7% within the last year, accounting for 18.4% of total loan growth, increasing $20.7 billion year-over-year and adding 572,550 new auto loans the national total, according to credit union analysts Callahan & Associates. Used car loans, meanwhile, rose 13.4% since August of last year, account for 25.8% of all loan growth during that span and have an average balance of $11,941.

Unfortunately, even at credit unions, auto loans don't always tend to be a great investment. The folks at note that of all loans that required a co-signer during the last year, 51% were auto loans. Unfortunately, 38% of co-signers were stuck with all or part of the bill because the borrower couldn't pay. That resulting in a drop in credit score for 28% of co-signers, while 26% say it damaged their relationship with the person they cosigned for.

A lot of that debt has fallen squarely on the shoulders of the youngest consumers, and with good reason. Though the Bureau of Labor Statistics puts the current unemployment rate at 5%, that jumps to 9.2% for people ages 20 to 24 -- or roughly the age of most recent college graduates carrying student loan debt. Only 70.7% of people that age are an active part of the workforce, compared to nearly 81% of those between 25 and 54.

That's the reason 48% of Millennials told Bankrate that they needed to save more, with older Millennials (25-35) citing "too much debt" as the primary reason for saving. Meanwhile, Generation X (ages 36-50) also cited a need to save more, with family costs and retirements weighing heavily on their minds.

According to a 2012 Insured Retirement Institute report, only a third of Gen Xers are "very confident" about having enough money to live comfortably during retirement, cover their medical expenses and send their kids to college. Just 41% have figured out how much they'll need to save for retirement. Among those who have saved, half have amassed less than $100,000. The study also noted that during the recession, 15% of Gen X-ers made early withdrawals from their 401(k) plans, 23% stopped contributing to their retirement accounts and 22% stopped contributing to college savings plans.

"If you wait too long, you might have to delay retirement and keep working a lot longer than you'd like," says Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group based in Fort Lauderdale, Fla. "Since neither employers nor Social Security will fully fund a decent retirement, you have to take the initiative."

Some have already received the message. According to Bankrate, 62% of Millennials are saving more than 5% of their income, up from 42% last year. Meanwhile, 29% of Millennials are saving 10% of their income, up from 22% last year.

"The good news is that many working Americans, Millennials in particular, are saving, and saving more than last year," says Greg McBride, chief financial analyst for Bankrate. "The bad news is that 21% of employed Americans claim not to be saving any of their paycheck - nothing for retirement, nothing for emergencies, and nothing for other financial goals."

By comparison, the rest of you are well behind Millennials' fairly modest savings goals. The percentage of working Americans saving 5% or less of income dropped, from 28% to 21% since last year. Americans saving more than 10% of their incomes increased from 24% to 28% since last year, but they still trail Millennials.

However, almost all consumers are behind where they should be when it comes to savings. Voya Financial notes that retirees will need 70% of their annual income to continue their current lifestyle in retirement, and according to GOBankingRates survey responses, J.P. Morgan Asset Management data and Census Bureau data on median incomes by age range, a 30-year-old making the median $54,243 should have about $16,273 saved. However, roughly 67% of workers that age are well behind that goal, 23% have less than $10,000 saved and a third of workers have no savings at all.

Meanwhile, according to a survey of 850 Millennials by The Principal, their three largest budget items - mortgage/rent (65%), food (38%) and car/transportation (30%) - are seen as obstacles to saving for retirement. As a result, 63% of those surveyed reported saving before 25, though less than a third of that group are saving at least 10% of their salary.

"It's clear Millennials are aware of the importance of planning and preparing for retirement," says Jerry Patterson, senior vice president of retirement and investor services at The Principal. "It's also clear they are struggling to balance that with all the other demands needing their time and money. Most Millennials we spoke with haven't done the math to determine what level of savings they should be targeting, but all agreed that they weren't doing enough."

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