Subscribe to this BlogShrinking salaries: why we are saving more
The big economic news this week is the May unemployment report, which comes out Friday morning and is expected to show that the jobless rate topped 9% for the first time in a quarter century. Bad news indeed but employment is a lagging indicator of how the economy is doing and even as the unemployment rate climbs toward double digits, the pace of job losses is slowing markedly.
For a better sense of what lies in our economic future, check out two other economic reports and an employment survey of large companies out Monday. These paint a more telling and sobering picture of the future as it affects you and me. First, there’s the news that frugality continues to reign. In April, consumers once again cut back spending, with consumer expenditures down 0.1%. That’s the second straight month that consumer spending dropped after a burst of buying in January and February as shoppers took advantage of deeply discounted goods. Meanwhile, personal income was up 0.5% in April but that was largely due to tax cuts and stimulus payments from the government. Which is why it’s no surprise that Americans’ personal saving rate soared to 5.7% in April, the highest level since 1995, according to the Commerce Department. People are worried about losing their jobs, so they’re socking away more money.
All that’s well and good – people are spending less and saving more. But even if you don’t lose your job and the economy continues to improve (which the stock market certainly seems to be anticipating after hitting its highest point since January today), a more worrisome trend is what’s happening with wages. Wages and salaries remain flat and for many people, lower. That’s because in this recession, companies not only are cutting staff, they’re slashing salaries too. According to a survey by outplacement (that’s a nicer word for companies that specialize in helping people who have been laid off find jobs) consultants Challenger Gray & Christmas, more than half of human resource executives surveyed in May said their companies instituted salary cuts or freezes to cut costs, up from 27% in January. While salary cuts and furloughs are preferable to outright job cuts, the trend has major implications for what kind of economic recovery we can expect. If people who hang onto their jobs or get laid off and get a new one can’t count on their earnings growing, they’re going to keep being thrifty. And without a real rebound in consumer spending, it’s unlikely we’ll have a strong economic recovery. Have you had your salary cut? Or been furloughed? Have you cut back your spending? Tell us what’s happening with you.
- Donna Rosato
I work for a big company that has been downsizing in the US for a decade or more, so I always worry about my job. Luckily I am still employed, as is my wife who is also going to school. Hopefully when she graduates we'll be able to earn enough together to replace the earnings I have now, because I don't expect to last even 5 more years with this employer, and I don't expect to find the same pay elsewhere. Our extravagance is our house, but our sons have learning disabilities and needed the support available in the local school district. We live frugally and put about 20% of our income into mostly tax-advantaged investments, but recent emergencies killed our backup fund, and now we are struggling to rebuild it. What lousy timing! At least the refi will be signed soon, that's $200/month we can sock away.
Hiring freeze, no wage increases, no layoffs. I am very greatful and fortunate. Saving approx. 10% as usual, still young.
My wife and I save about 31% of our gross income. SO HELP ME we will never stop. We have self managed 401ks. We've never had a big screen LCD. We've never had an SUV. Our only debt is a $700.00 mortgage. We have two kids in college and one on the way. We are investing in our future, not spending it. What a nation we could be if we all had our financial priorities right instead of having suffering set them right for us.
The only way to get out of "wage slavery" is to buy your own freedom – the more you save, pay off debt, and live cheaply, the sooner you can tell your boss to take this job and shove it.
T in OKC.
I'm not an elite. I went to good school, worked my way through with minimal loans. I always worked hard towards my goals. I sent in 15 resumes a day to where as my friends sent in 1-2 a week. I recieved 5 offers during these bad economic times and that leads me to believe that with hard work pays off. I think same can be applied to finance. Right now I save about 40-50% of what I make. I go out, I have a normal car and I rent a place in a nice area. My girlfriend saves more than I do. However, just because I have savings and what not it doesn't mean I need to go out and buy a hummer, buy a new house and bring down my savings rate to close to none. Now I understand that people have the right to do that, but look around and see where that has gotten us. Who came up with the idea that you have to save only 10% anyway???? The more you save the more choices you will have down the road.. you don't like corporate america.. you can start a business, you dont want to start the business, you can get educated and become a doctor, play the stock market or whatever there is you want to do. Save more, save as much as you can.
Donna: thank you, thank you, thank you! This is the kind of honesty that is rarely seen in the press these days. I am not sure where this "V-shaped" recovery will come from that so many seem to expect.
As for myself, I work in a mission-critical department of a large area medical center. I feel very fortunate to have a relatively stable job, and feel even more fortunate to have gotten a 3.5% raise this fiscal cycle. I've always been a pretty frugal person, so my lifestyle hasn't changed much because of this downturn. I am of the mindset that we as a nation, unfortunately, have a long time ahead of us in this downturn. There's not much on the horizon that seems to point to a recovery for us.
I used to work as an engineer for a consumer products company and voluntarily left so I could avoid relocation due to personal family reasons. I am now working for the federal government and obviously took a paycut as a result. Luckily I am early on in my career with no one else to support, just having graduated college in May 2008. I have substantial debt from my college loans but I am making it a priority to make every credit card, student loan, and utility payment in full and on time. Of course, like every college graduate, I would like to buy a new car, a 50 inch TV, and all of those material items…but I have come to recognize what comes first. I am making it a priority to bank away a minimum 5% to my 401K as well as purchasing top notch health and dental insurance. Those things come first, and once I have moved up in the GS level I will then consider making bigger material purchases.
Right now, it's back to the basics and planning for the future.
Our company has 3 divisions with each being responsible for their own bottom line, so it's up to each division how they meet their goals. The division I am in has down layoffs and cherry picked some of us to take one week furloughs.
The comments posted are so in line with reality. What really grinds me is once again, big business, OIL, who made record profits the last several years, is up to it again by raising the price of gas just when it looks like the begining of a recovery is on the horizon. Big business is always ready to grab that last penny in the working people's pocket. I believe there is a special place in Hell for those folks!
I was layed off in late '07. Found a job after 7 months—but took a 40% pay cut in the process. My wife continues to work 3 days a week..
I have stopped saving for retirement and now have to work 3-4 more years until I can rebuild my savings that were damaged during the past 9 months.
At least I have a job and am not digging into my retirment savings 
I think we're only seeing the beginning of what's ahead. How are people going to live between increased taxes, higher prices for items and few if any jobs?
If you sit back and consider what's happening, it's scary.
I changed job last year and took a 5% cut to work close to home. Now at the current one, everyone was handed a 10% cut. I have one kid and another on the way. That worries me. As far as cutting on expenses, my wife and I are just monitoring our expensese closely as we never had unnecessary expenses. And you cannot cut from your basic expenditure. With the 10% cut however, it will mean less saving for our retirement.
We all got a "wage holiday" the first of the year, then a 10% cut this month. Our son and daughter-in-law are auto industry casualties so we help them. But we're cutting back where we can and still putting in 15% to our 401k. Hopefully we all learn something from this and come out the other end stronger and wiser financially. With 12.5% unemployment in Michigan, our family has it better than many of our neighbors.
I've been working for this company for almost 20 years. This is the first time they have instituted wage cuts (5% for staff, 10% for managers and 15% for senior mgmt) since Desert Storm back in 1991. Hopefully this will stem the tide till things get better and they can avoid large-scale layoffs.
my husband works in the tech on wall street. His company went bancrupt last year and then there was a salary freeze by the take-over company. No bonus, either.
I managed to find a new job in March and things have been OK..but going back to work after five years and two young kids, not easy.
I guess everyone has to fee the economic downturn, including the kids.
thank god i am in lawenforcement withover 10 yrs in. the y woul have to fire half of nypd too get to me so maybe i am safe? i have 9-10 yrs to early retirement. i save alot,dont spend over my neds but still get screwe d by chase late fee even when i was a day early
I work in the financial industry and have made less money every year for the last three years. The unemployment rate for college educated people may be lower than the overall rate, but I know of very few people making more money now than they did a year or two ago. Losing your job almost certainly means a lower standard of living, even if you get employed immediately. A number of my friends have also had forced pay cuts or salary freezes implemented at their companies. On top of the stagnant wages, the employee share of healthcare continues to increase much faster than inflation. So in the end we all have less disposable income.
Therefore, it will be quite a while before my family will be trading up to a bigger house, buying a new car, sending our kids to private schools (any longer), or be taking vacations away from home. Our mantra has become pay down our debt and prepare for the worst.
I expect that to mean higher inflation (less purchasing power) and higher taxes.
My financial compensation has been effectively reduced. My quarterly profit-sharing which had been previously considered part of my financial compensation was redefined into a yearly "bonus". The new guidelines for the bonus make it less likely that I will get the full amount.
In addition as the quarterly profit-sharing is being phased in to the yearly payments, the amount of "bonus" or "profit-sharing" money that I receive is down 25-40% from previous standards over a 2 year period.
Thank God we had reserves to pay for our 2 children that are now in college and that one of them will graduate in 2009.
I work in the tech arena… my last company went Bankrupt last April 08', we had not had raises in the previous 5 years. A client I was working with hired me directly a week after I lost my job with my previous bankrupt employer. The new company I have been working for over a year now didn't give us a salary increase but they did give us a bonus which was the amount of the salary increase would have been. So we got a lump sum check in April of about 4.5% of our salary. I guess they save money somewhat because they don't commit to an increase for everyone in the resulting of higher salaries commitments. We had such a backlog of work earlier in the year but now that is cleared out and our business has taken a substantial drop off. I can really relate to this article in that after the year 2000 I saw tons of layoffs in my industry, so at that point I made an extreme effort to save and become thrifty as much as I could including getting a roommate in my house. The result of that effort is that now I have several years of money saved now in safe bank CD's. I just keep rolling them over and try to find the highest yields. So whatever happens to me or how it affects me next I feel as prepared as I can be. Georgia is at 9.3% unemployment and I have had many friends loose their jobs, some took a year to find another while others are still looking. Regardless it appears that everyone wants to pay you less now.
The wife & I will put about 40% of our gross income into tax-defered retirement accounts in 2009; about the same as in 2008, and up slightly from prior years. We have not significantly cut our spending but then we never spent that much. No cable/satelite TV, no high-speed internet, no balances carried on credit cards, have never had a car loan
(currently have 3 cars), balance on home loan is about 25% of current lmarket value of house. Combined annual income well under 100k- not a whole lot of income but we have always lived below our means. Retirement in 12 to 15 years and all is looking good at this point.
My husband and I give thanks regularly for our good fortune — we both have solid incomes and excellent job security. We've both had our wages frozen, but as we were already living well within our means we don't expect that to hurt us much.
Instead, we've been conscious about continuing to spend money, especially at locally-owned businesses. Our natural reflex was to spend less in the face of all the bad economic news — but then figured that since we have the rare blessing of income security, the best thing we could do for the economy was to keep spending as usual. It is a strange economic climate that makes Sunday brunch at a locally-owned restaurant feel like a patriotic act.
I was laid off in January as an accounting professional and we have certainly cut back. Fortunately my wife is a teacher so at least we have some income plus my unemployment. If my unemployment continues much longer we will look at cutting our land line, reducing our cable TV, adjusting our auto insurance, and possibly sell a car. This is certainly not the position I expected to be in closing in on retirement. I find it interesting when articles say that people will work longer and pospone retirement. What happens if you loose your job and can't find another one?
My salary has only been frozen for this year, and I'm thankful that's the most pain I have felt. Meanwhile, my wife and I began increasing our savings late last summer and increased that as the recession took hold. That's not a temporary measure for us. We knew we were not saving enough in non-retirement accounts for our short term and emergency needs. Now that we're in this saving habit, we'll continue it and increase this saving as we can.
Additionally, we don't use our credit cards unless we can pay the bill at the end of the month and are being more selective in choosing what and when to buy.
The upside is that we've never felt more in control of our finances, rather than feeling overwhelmed that our finances and poor spending habits were controlling us.
Wife lost her "service industry related job" in the restaurant segment. Since then the toll of working on the feet have kick in to boot knee damage and back issues. Now we get by on my income until we get her up and running ( it has been almost year now) if ever. Frugal is an understatement, she has not crossed the bridge were she understand the 1 to 2 K a month she brought home is now gone instead she thinks we can still live in the same fashion. But with talks and visual aid (seeing is believing) she is getting there, she started with our cable and phone and internet and saved us 130 dollars a month. We removed a couple of free loaders from the home as well and that has helped as well relating to consumption of food and energy and water. Changed the lights to low energy has also assisted as well. Bought a back up car if we have to turn in the one we are paying for if it gets worse. All this savings goes to the food bills and the little extras (i.e. Bdays parties gifts mini golf musuem trip ect.)
Frugal = Survival.
So the average adult wants to spend 25% of his/her adult life retired but is saving just 5% (such a soaringly high value). Assuming the same 3:1 ratio of work:retirement one would come up way short, but I'll spare us the math.
Good thing we can expect our homes to magically make up the difference, just by sitting there and appreciating. Oh, wait…
My savings has not changed much. I already have 15% of my earnings going into a 401K and 10% of my wifes. This has been in place since the 401K was available and will continue. We have been watching our spending a little more becasue I get part of my compensation as commission so my income is naturally down. We took a company wide salary freeze this year also as well as my wife. I have always purhased things based on my salary only so we have never overextended ourselves. We should look at an increased savings rate as a good thing. It is showing that people are being more responsible with their money. I hope it lasts. Also an increaed savings rate makes more money availble for investment by private enterprise which will hopefully lessen the "crowding out effect" that all the government spending will eventually have on private enterprise ability to raise capital.
Very timely article. One quick comment: I am very disappointed with politicians of both parties and U.S. companies in general who have continued to send our IT jobs, manufacturing jobs, and phone related jobs overseas. Has anyone besides me noticed how rare it is today to find an article of women's clothing that says "Made in the USA"? I am tired of calling the toll free number to an airline (such as "Amierican" airline) or my bank or my service number for my computer and getting a voice on a crackly, faint connection to a person who is in India, the Phillipines, or South America. We will have 10 percent unemployment fairly soon, so why are we still sending all these jobs overseas, while allowing illegal immigrants to swamp certain states?
The U.S. economy will continue downward
as the demographics of the country change. Third world people will create
a third world country here just like they did where they come from. Get use to it.
I'm lucky so far. We are in a hiring freeze, but no layoffs. We were given a 3% raise which amazed me. I am in a max saving mode just in case the company gets in a tight and has to let me go. This is a stressful time for me.
reducing imports?
more importantly, we need to get our $$$ from the local fat cats. how are we doing on that?
they r still fat while we are all still losing jobs. this is just wrong.
focus: the fat cats r the problem.
Responding to D, the middle class has overextended its self but I'm almost certain your vast fortune came from middle class dreams of living the life you have.
The Elites have for to long sold the idea that all of us can be like them and have profited heavily from this lie. Look in the mirror before you blame the uneducated masses for believing the "New American Dream/Dilusion" that the wealthy created.
I'm middle class but educated. I have saved heavily and at 26 with a blue collar job have 75k in middle America and despise the Elite. HOPE it gets better or the proletariats will stop believing your lies.
I suffered through the downturn of the early 1980s. I had to take a menial wage job shuttleing cars for a car rental company since I was attending college and had to pay my own way. Finding a decent job was pretty difficult back then, and that experience has stuck with me since.
I live frugally and have always saved at least 10% of whatever I have earned these last 25 years. I am not in dire straights like many these days, and that is due to a career of saving versus spending.
I just came back from a mandatory five day furlough. Everybody in the company has to take the furlough.
Since my industry (major airlines) took a huge hit post 9/11, and our wages were cut just to survive, this is a double whammy. Many of my fellow employees and I have taken a 30+ percent pay cut, lost vacation and holidays, and fall further behind every year. I think I'm beginning to understand what the steel industry went through in the 70's!
Psalm 33:20-22!
yes. I took a 10 % salary cut whereas my husband took a whopping 40% cut. This has affected out spending power as gas prices and other commodities continue to soar. We havent been to the mall for months now or done any big purchases. It has definitely cramped our lifestyle.
Everyone at my company recieved 5 furlough days. In either case spending habits in this country have to change. we've got mechanics and service managers who make between 30k-60k max and they drive around in Jaguars, brand new trucks and BWM's. Most of the executives at my company who make far far far more drive cars that have a better value. I have a brother who's house I am trying to rent out for $3800/month in a neighborhood where homes cost no less then 7 figures. It's unbeliable to me when people show up trying to rent the house and right out tell me that they think they fit better in that neighborhood despite the fact that they can't afford it. First make some money and then by your own unless it's a temporary housing need due to relocation for a job. Also, no soccer moms don't need extended triple cab chevy suburbun so they can take their son to practice. People have lost common sense.
Donna, this is a great article. It tells me that we are actually in a depression: deflation is occurring, as many prices have been falling, and now wages are falling, too.
This is more common than most people realize. When this has happened in our country's past (1792, 1819, 1837, 1873, and 1929), people have reduced their debts dramatically during the 4 – 5 years of deflation. We probably have 2 – 3 more years of it to go, as we are already 1 – 2 years into it.
My gut instinct is that people can continue to thrive in a stagnant wage environment as long as the prices of things that they have to buy keep falling faster than their incomes. The biggest cost for most people is housing, and this cost continues falling quickly from very high levels.
We really need to focus on reducing imports (mostly oil from OPEC and cheap manufactured goods from China) to increase our national savings, too.
Make no mistake about it: falling prices are very tough on people who are laden with debt, so they should take action immediately to reduce their debts in any way as much as possible.
While I have not seen salary cuts or furloughs personally, I'm definitely keeping my spending in line (intake exceeds exhaust).
I am fortunate enough to be working, however, my husband is a consultant and we are always at the edge of our seats about whether he will be there for another month or a few. So we are def saving a lot more than before. We are in our late 20's and are thinking of starting a family soon and with everything going on we are pretty much putting a hold on things till we get finances straightened. Although, these are real fierce times i think alot of us have woken up to reality; realizing the true meaning of material vs essential. I save keep saving and pay down the debt….