Greg McBride

Vice president, senior financial analyst,

There has been progress on the debt front. When you look at what’s known as the debt service ratio, that’s the percentage of monthly income that’s devoted to debt payments. It’s currently at a 29-year low, and it’s still falling.

Now, there are a few reasons why we’ve seen that progress. Some of it is because people have paid down debt. Some of it’s because they’ve refinanced at lower interest rates, and if not reducing the debt burden, they’ve at least reduced the monthly payment. And some of it, too, is due to defaults and charge-offs. But at the end of the day, that debt burden is lighter than it’s been, and ultimately that’s going to help savings because the less money that’s going out the door toward debt, the more money people are going to be able to push into things like emergency savings and retirement savings, two areas where Americans are woefully under-saved.

And the problem is, we’re dealing with stagnant household incomes right now, particularly for lower- and middle-income households. So we haven’t really seen that deleveraging bear a whole lot of fruit in terms of being able to move the needle on savings. One thing we see at is that people do feel better about where they stand from the debt standpoint, but they still feel lousy with regard to savings.

By more than a two-to-one margin, American consumers say that they’re less comfortable with the savings they have today than what they had a year ago, even though in some of those cases they have a little bit more money put away today.

“Pay yourself first” is automating the saving process. You’re getting that money into a savings account whether it’s retirement, for emergency savings, or ideally both. These are goals you can attack both at the same time, and get that directly from your paycheck into a dedicated account before you have a chance to spend it. And that does two things. First, you’re not waiting until the end of the month to save. You’re getting it done first. But also, it forces you to live on less than you make, and that’s really the essence of saving. You have to forego consumption today in order to have consumption in the future.

Look for an opportunity to refinance your mortgage. That’ll save you hundreds of dollars per month. Look at refinancing the car or reducing your auto expenses, going from two cars to one, buying a cheaper vehicle. If you have savings, you can increase your deductible and save money on insurance premiums and other insurance. Shop around your homeowner’s insurance. Shop around your auto insurance. These are ways you’re going to save a tangible amount of money out of your budget.

And then secondarily, is increase that retirement savings contribution to the 401(k). Increase the money going into your emergency savings so that you’re not tempted to spend that windfall.

We’ve seen a turn in the past two months where now people are saying, you know what, I feel as if I’ve progressed. They’ve paid down debt. That’s starting to make them feel better. But the stock market, the rebound in housing has a positive wealth effect, people starting to feel better about their finances.

Now, some of that can be very fleeting. Another couple of months down the road, people might not be feeling as good. But they are making progress. And when we get to a point where we see job growth continue, you start to see incomes go up, a lot of those steps that people have taken will start to bear some more positive fruit.