In 2022, the American personal saving rate fell
to a low not seen since the Great Recession.
I think a lot of people have been just kind of
cooped up during the pandemic times and now
we're transitioning plus inflation.
So it definitely has been a little bit harder.
Economists will look at the savings dynamic and a
sort of benign light savings accrued over the
early part of the pandemic, and that's
starting to get spent down. But on the personal
level, though, that's not a pleasant process.
This real time dip in saving is stressing out a
lot of people.
70% say they are stressed about their personal
finances, and that includes 57% of people
earning $100,000 or more.
And the main factors contributing to financial
stress for the six figure set include
inflation, economy wide instability, interest
rates and a lack of savings.
The basic necessities of life substantially burden
your income. It becomes difficult to save.
That said.
Americans are sitting with a lot more savings
than they had in the past.
According to bank deposit records, Americans as a
whole are still better off than they've
traditionally been.
How much depends on which side of the income
distribution you're on.
Regardless, Americans across the board were
drawing down those savings in the final
quarter of 2022.
So why did Americans stop saving and what
effect will that have on this massive group of
people that we call the economy?
My name is Mykail, but the interwebs know me as
the bougie budgeter because I make money
easy. I am currently based in Phoenix,
Arizona.
The majority of US households use bank
accounts. Mykail represents one of these
households.
I do take about 8% of my total
income, and that is to my 401k contributions.
My company matches at 8%.
I also try to save an additional 15% as
well as another about 10% of my take home pay I
put towards my investing goals as well.
So my personal savings rate after my take home,
I shoot for about a 15% and I have my savings
auto deposited right into my high yield
savings account because if I do not do that, then
I will accidentally spend it and I am a
recovering over spender.
And that was my solution to not overspending.
Collectively, Americans have trillions more in
savings than they did prior to the pandemic.
For a broad swath of Americans, their
financial condition is still probably better
than it was pre-pandemic.
But those cash cushions are deflating for the
first time in years.
The personal saving rate reflects how much income
Americans hold onto after their taxes and
regular spending.
It's basically just the amount of that that is
not consumed.
Much of that income, particularly for what I
define broadly as underserved communities,
tends to go toward basic necessities like housing,
food, health care, transportation.
In February 2023, the personal saving rate was
hovering around 4.5%.
That's compared to a long term average of just
under 9%.
You would see spikes around the dates when
those stimulus checks were sent out and those
were not getting spent.
Of course, the other thing that happened early
in the pandemic is people were not spending
money on the things that they were accustomed to
spending on.
As inflation has set in, the monthly savings rate
has taken a tumble.
This rate only describes one month of earning and
saving. Take a look at the total deposits held
by customers and banks and you'll see that there
is way more value in people's accounts than
any time before the pandemic.
A lot of people would point to excess savings
that occurred early in the pandemic, something
like 2 to 2 and one half trillion dollars in
savings above what we would have otherwise
expected were saved by American households.
Over the past 9 to 12 months, that stash of
savings has eroded.
It's probably somewhere in the 1 to 1 and one
half trillion range.
You had folks across the country accumulating a
bit of a war chest of savings, and that really
has helped to buoy the economy, particularly in
a place like the US where consumption is such
a big part of GDP.
The top half of earners have over $1 trillion in
excess savings. That's nearly three times as
much as the bottom half, according to federal
economists. But they believed the lower half
still collectively holds hundreds of billions in
excess savings.
By their count, it breaks down to about 5500
per household. A note here, this may not mean
that you have $5,000 in spare cash laying around.
It may have gone to pay off that amount in
student debt or a mortgage or a car or to
wards your retirement.
37% of Americans have not touched their pandemic
savings and 45% of Americans either haven't
touched it or have taken out a little bit.
But the majority is intact.
Only 17% of Americans have pretty much
exhausted their pandemic savings, though.
That cushion may be beginning to shrink.
Inflation, a nd the implications for that
across categories, whether it be food,
whether it be fuel, whether it be rents,
you're seeing cost inflation that eats into
clearly people's current income, but also to the
extent they have savings, it also eats
into those savings because everyday things
are just more expensive. And if you think about in
a pre-pandemic world when a typical black
family had about five days of liquid savings,
there's not a whole lot of financial slack in the
system to be able to weather periods of time
without income.
Economists believe that the extra savings have so
far kept people spending and the country from
recession. At the same time, a huge swath of the
population is living paycheck to paycheck,
according to recent surveys.
Take a look at our poll of 1000 people across the
country. What you'll find is that 69% are
pessimistic about the current situation in the
economy and they're pessimistic about the
future. That's an all time high.
I think the consumer is doing pretty well.
The concern I have is that the whole world is
talking about this recession that we're
going to have, which we were supposed to have
last year. Then we were supposed to have the
first quarter of this year. Now we're supposed
to have it the second half of this year.
Sometimes when you scare people enough into
thinking there's going to be a recession, they
will stop consuming and it can be a
self-fulfilling prophecy.
Federal economists note that the low interest
rates of recent years are backstopping many
Americans. When this rate goes to zero, the
cost to loan out cash declines.
And you can see the effect playing out on
this other chart.
Personal interest payments sank below
longer term trend growth. With these excess
savings, the economy remains strong, but they
expect those stockpiles to dwindle rapidly.
These dynamics are observable around the
world. Nearly all developed countries have
declining household savings. Back in the
States, trouble in the regional banking sector
may affect the future direction of interest
rates.
The Fed is trying to slow down the economy.
That reduction in lending by regional banks
might very well do that work for them, which
means that we may be near the end of interest
rate hikes.
The Fed's interest rate can affect how much money
you make from saving.
When the rate goes up, putting money away
becomes more valuable.
But if it goes down, that could change what
your account offers in terms of interest when
you are in.
A rising interest rate environment.
Savings rates do tend to lag that process.
So right now the Fed has rates close to 5%.
I doubt that very many people can get a 5%
savings rate on a typical savings or
checking account.
It's a lot happening right now.
People are losing jobs.
There's just so much happening that it's okay
if you're not having a 15% savings rate, but
just as long as you're starting somewhere.
There are many different ways to save your money,
but different methods can generate returns for
you as a saver in the form of interest.
There's no easier way to save money than to have
money taken out of your paycheck before you get
it and have it go into a retirement plan That's
either getting a tax deduction plus tax
deferral, or it may just be tax free for life if
it's a Roth. But either way, the money's taken
out first.
Cash stored under your mattress effectively
delivers a negative return, at least when the
US has inflation.
As prices rise, your old money is worth less when
it comes to your standard checking
account. Big banks like Wells Fargo, TD Chase and
Bank of America routinely offer low
returns. By contrast, high yield savings
accounts can deliver much more in interest.
The national average is incredibly low.
I'm high yield all the way, especially for any
dollars that I'm trying to save.
I suggest always any short term savings, any
long term savings. I'm not a fan of leaving in a
savings account, but anything that's between
six months to 24 months leave it in a high yield
savings account.
The national savings interest rate was less
than 1% in 2023, but some high yield accounts
were netting 4%.
That's much better than in the past, but still
lower than inflation.
And you may be shocked that you're still getting
0.1 or 0.3% and you can easily get
north of 4% without taking any undue risk on
your cash. That's a game changer.
But not every bank offers a high yield option and
not everyone seeks them out. Roughly 6 million
Americans were unbanked in recent years.
This means they don't use checking or savings
accounts. The most common reasons were lack
of funds, or they simply don't trust banks.
You've got to reset the thresholds to make sure
banking is not burdensome to these
individuals, particularly for folks
who have lower income, lower net worth, to the
extent that they are banked, their money sits
in checking and savings accounts.
I think it's probably the case that a lot of
families are leaving some money on the table.
A high yield account is going to also offer a
better rate than you might get with a typical
savings account.
You might often have to have a larger balance in
that account to qualify for the higher rate.
I had one of those moms who was also a money nerd
just like me, and she had a high yield savings
account back in like 2006 when the high yield
savings rate was like 8%.
Banks are offering higher returns for two reasons.
Number one, they're competing for your
business. And number two, the interest rate
hikes out of the Fed make it easier for them
to lend to you at a favorable rate.
Smaller banks often use this strategy to build
their deposits.
Even companies like Goldman Sachs have used
this tactic, and companies like Apple are
getting into the game as well. Other products,
like certificates of deposit, can make your
money work for you.
I actually got my first CD by myself without my
mom. I was like, You know what?
I'm probably not going to use this until I
graduate and I'll let that mature.
And I know that that rate is locked in, which
is a lot different from a regular savings account
where that rate is not locked in a.
CD usually carries a higher interest rate, but
it also has a fixed term.
So your money is going to be tied up in that
product until the term ends.
So there is a give and take there.
But I think for a lot of households, if they have
the cash to invest over a certain period of time,
the CD is a really good option right now.
But no matter how you get it done, saving it all is
a good start.
Compound interest is real.
So to the extent that you can put some amount
away, even if it's below the threshold that you
had set out maybe a year ago or two years ago when
the environment looked very different.
That's okay.
Don't be hard on yourself. Saving a dollar
today is still more than saving $0 today.
So if you can only start small, start small and
let that habit grow, you're still doing
amazing.