The Huffington Post had an article earlier this month titled, “America Desperately Needs to Double Its Savings Rate: Here’s How to Do it”. According to the Bureau of Economic Analysis, the US savings rate is now below 5%, a decline from over 10% in the 1970s. The amount that we’re saving is also declining, largely due to increasing living expenses like student debt and health care. What has also changed, according to the article, is the level of support that the average individual receives to encourage saving. Historically, employers offered pensions, whereby the employer saved on behalf of the employee. Employees didn’t have to make decisions about how much to save and where to invest. Now, saving for retirement has become the responsibility of the individual. If your employer happens to offer a 401k plan, it is your responsibility to enroll, choose the amount and make decisions on how to invest.
What the article doesn’t point out is the impact of low interest rates on saving. Interest rates peaked in the 1980s and have declined ever since to now some of the lowest rates in history. When interest rates were high, you could open a savings account at your local bank and earn a meaningful return on your savings. You could watch your savings grow over time which provided a real, tangible benefit to saving. When interest rates are low, in addition to not being to see your savings grow over time, another impact is the difficulty of teaching new savers the value of saving and investing. Someone earning 0.03% on their savings account is not going to experience the positive reinforcement of earning interest on their savings and watching their account grow over time.
The alternative to the traditional bank savings account, and the path to obtaining better returns, is to open investment accounts and invest in the stock market. Traditional financial firms have historically made this difficult for new savers for a variety of reasons. Account minimums can require a minimum investment just to open the account. Trade commissions of about $10 a trade can make it expensive for a new saver to invest. Additionally, some traditional financial firms use language that can be confusing or intimidating for a new savers.
New products and services, however, are emerging to make it easier for new savers to gain access to investment accounts.
Our company, Spark Gift, has taken the approach that the act of giving a gift, can be the spark that helps someone become a new saver and investor. Spark Gift makes it easy to give stocks and funds as gifts to friends and family. The gift recipient opens an investment account online while they are accepting the gift. There are no account minimums and no trading fees. Spark Gift also makes it easy to add to the account and for others to contribute.
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