In 2005, our national savings rate was negative. How is this possible? 

Expert Answers
pohnpei397 eNotes educator| Certified Educator

It is possible to have a negative national savings rate because it is possible to spend more than you take in in a given year.  This is true even for individuals and families.  We say that we have to live on a balanced budget, but the truth is that many people do not.  Whenever you spend more than you take in in a year, you have a negative savings rate.

There are two ways that a person can spend more than they take in.  First, they can dip into savings that they have accumulated in past years.  Let’s say that you want to buy a new car this year.  You use savings from past years to pay for it.  It may be that what you pay for the car, plus your other spending, comes out to more than you made in wages this year.  Second, people can borrow money.  We know that many Americans buy lots of things on credit cards and do not pay their entire bill on time.  When they do this, they are effectively borrowing money to pay for their purchases. 

If enough Americans do these sorts of things, we end up with a negative savings rate for a given year.