The late economic historian W.W. Rostow had long -term roles in the administrations of two presidents. But he is probably best remembered for his 1960 response to the challenge of communism.
It was a book, “The Stages of Economic Growth: A Non-Communist Manifesto.”
In it, he identified five stages of economic development. The stage most people talked about was “the take-off,” the moment when a nation saved enough that the savings per capita began to grow.
That’s also when income began to grow. And when new opportunities appeared. It’s when a nation could get off the Malthusian treadmill with population growth exceeding any increase in savings. Rostow looked around the world. He saw getting to that moment as a challenge and an opportunity.
I loved that book. It set a great mood of possibility and mission.
The take-off point goes beyond nations
But if entire nations have a take-off point, so do we as individuals. So do family households. Better still, if we reach our take-off point, we’re on the way to getting off the payday treadmill. We’re on the way to a secure retirement at least, or early financial independence at best.
The sad part is that so few get there.
Many never reach their take-off point. Instead, they buy a new car, take an expensive vacation or decide their 4,000-square-foot house desperately needs an outdoor kitchen. They borrow to spend. They guarantee they will be repaying debts rather than starting to save or adding to savings. They choose to own things that decline in value rather than appreciate. They collect things that consume income rather than create it.
Why do so many people fail to reach “take-off?”
We’re not talking about the clueless here. This is way beyond the inevitable population of the entirely hapless. An abundance of survey evidence shows that millions of people live in a financial condition that can only be described as precarious.
— One often cited Federal Reserve study in 2018 found that 40 percent of households couldn’t cope with a $400 unexpected expense. Even without an unexpected expense, the same study found that 22 percent of households expected to avoid paying one of their regular bills in the survey month.
— EBRI, the Employee Benefit Research Institute, recently found that 40.6 percent of all U.S. households aged 35 to 64 were projected to run out of money in retirement. That was an improvement from 42.3 percent in their 2017 survey.
You can’t spend your way to savings
— A 2018 study by the National Institute on Retirement Security found that 59 percent of all working age individuals had no retirement account assets in an employer-sponsored plan or in an IRA. Neither were they covered by a defined-benefit pension plan.
That bloodless 59 percent figure, by the way, translates into more than 100 million workers. Among those 55 to 64 approaching retirement, the study found that 68 percent had retirement savings less than a year of their annual income.
— The National Academy of Social Insurance finds that Social Security provides more than half of all income for 61 percent of retirees. It provides virtually all income for 33 percent of retirees.
An amazing number of people missed the takeoff point memo.
So let’s answer a simple question: How do you reach your “take-off point”?
The obvious, simple answer.
Spend less than you earn.
It’s that simple.
Trouble is, no one wants to figure out how they spend their money.
Let me repeat that. NO ONE.
I’ve been writing a personal finance column since 1977. I still haven’t run out of fingers for counting the number of people who can immediately say, “Last year I spent this much on (insert category), spent this much on taxes, and added this much to my savings.”
How you spend is as important as how you invest.
But here’s a blunt reality: If we don’t make positive decisions about where and how we spend our money, we’ll never control our spending. We’ll always be the victim of an impulse or a particularly effective advertisement.
Is there any good news here?
Yes! Knowing where you spend your money has been getting easier and easier. It doesn’t require taking up permanent residence under a green eyeshade.
If you want to be detailed and fastidious, you can use a computer program such as Quicken. In a few months you’ll know exactly where your money goes.
If that’s too much bother, you may be able to do it through the services that run automatically on your bank account, your debit card and credit card. You can also put it all together by using Mint, a free online money tracker.
The important thing isn’t how you do it, but that it gets done.
Related columns:
Scott Burns, “The Thinness of Wealth,” 5/24/2015 https://scottburns.com/the-thinness-of-wealth/
Sources and References:
W.W. Rostow biography on Wikipedia https://en.wikipedia.org/wiki/Walt_Whitman_Rostow
Federal Reserve Board of Governors, “Report on the Economic Well-Being of U.S. Households in 2017, 5/2018 https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf
Jack VanDerhei, “Retirement Savings Shortfalls: Evidence from EBRI’s 2019 Retirement Security Projection Model, 3/7/2019 https://www.ebri.org/content/retirement-savings-shortfalls-evidence-from-ebri-s-2019-retirement-security-projection-model
National Academy of Social Insurance: The Role of Benefits in Income and Poverty https://www.nasi.org/learn/socialsecurity/benefits-role
Jennifer Erin Brown, Joelle Saad-Lessler and Diane Oakley, 09/2018 https://www.nirsonline.org/wp-content/uploads/2018/09/SavingsCrisis_Final.pdf
Mint https://www.mint.com
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Photo by Andrea Piacquadio from Pexels
(c) Scott Burns, 2020