As the red flags go away, that could be a big deal.
The personal savings rate – that is, personal savings as a percentage of disposable income, or the share of income left over after paying taxes and spending money – fell to 3.3% in the third quarter 3.4% in the previous quarter, the government announced on Thursday. This is the lowest level since the Great Recession and the eighth lowest quarterly rate on record (since 1947). Adjusted for inflation, savings are down 88% from their 2020 peak and 61% lower than before the pandemic.
The personal savings of Americans reaches 626 billion dollars in the third quarter of 2022, according to the Federal Reserve Bank of St. Louis. That’s down from $1.98 trillion in Q2 2021 and $4.85 trillion in Q2 2020, when boosted by COVID-related government cash. But it’s also down from $1.41 trillion in the second quarter of 2019, before the coronavirus pandemic brought the economy to a halt and sparked a wave of government benefits.
But the current picture is complex. Wealthier people pay more taxes: Some economists say savings could fall as more investors pay capital gains taxes on stocks they’ve sold in the past year. “Excess savings” – the amount that households have saved compared to what they would have saved without COVID – reached $1.7 trillion in mid-2022. But $1.35 trillion of that was held by the top and third income quartiles. In the second quarter of 2021, the savings surplus stood at $2.26 trillion.
“A large part of this figure is due to the very gradual fiscal support at the start of the pandemic – in particular the stimulus checks and the expansion of unemployment insurance,” the Federal Reserve Board of Governors said. said in a statement last month. “While the balance sheets of many low-income households may have been strengthened by these programs, some households may have fallen through the cracks of the social safety net.”
Mingli Zhong, a to research associated with the Urban Institute, a Washington, D.C.-based think tank, said people will either start to cut back on their spending, which could help lower prices, or deplete their savings by spending their income on the ‘essential. In the latter scenario, the United States would likely tip into another recession, she added, which many economists are already forecasting for 2023. “More households with little savings would have little protection against a recession.” , Zhong said.
“The pandemic has left people in a vulnerable state.”
What happened? A combination of wages not keeping up with inflation and people letting loose after being locked down during the pandemic. “Many people’s shopping habits froze, even when people were stuck at home and the only person they could see on a daily basis was the Amazon delivery person,” Janet Lee Crochman, a certified public accountant in Costa Mesa, Calif., told MarketWatch. And now? “I think the gloves are off and people are playing catch-up.”
After the worst days of the pandemic, Americans wanted out. “People want to relive life and create happy memories to help replace those who aren’t so kind they have from pandemic years,” Krochman said. Credit card debt went to $887 billion in the second quarter of 2022, according to the Federal Reserve Bank of New York. That’s up 13% on the year — the biggest annual increase in 20 years.
The pandemic, however, has left millions of American workers in a vulnerable state – essentially a paycheck from living on the streets. On the one hand, the stimulus checks have led to a record drop the number of American households without a bank account last year. The number of unbanked households fell to 5.9 million last year from 7.1 million in 2019. On the other hand, the ability of Americans to pay their bills on time fell for the first time in five yearsaccording to a recent report.
How to boost your savings
And now ? Krochman recommends automatic drafts from checking accounts to high interest savings accounts“if you can’t have [money] withdrawn from your paycheck in an employer-based type of plan. Keeping money “out of sight” also keeps it “out of mind” and helps prevent impulse spending, she adds. And the 401(k) contribution limit will jump almost 10% in 2023. A good 401(k) to plan comes with a corporate matchas well as low-cost investment options and low fees.
Others agree with this approach. “Move money with each paycheck into a separate savings account,” said Ted Rossman, senior industry analyst at Bankrate.com. “Some of those returns are now over 3%. For instance, Direct UFB and Direct savings in dollars,” he said. “These are the highest savings rates we’ve seen in years. You’re less likely to miss what you don’t see. Pay yourself first. (A recent Bankrate survey found that only 27% of people saved six months of expenses.)
Another tactic: look for a better paying job, ask for a raise or take a side hustle, Rossman said. “Sell things you don’t need. Drop infrequently used subscriptions. Cutting a recurring monthly expense has 12 times the impact of doing the same thing once. Negotiate lower prices. I recently called my cable/internet/phone company and satellite radio provider and realized substantial savings just by asking for a break. This represents hundreds of dollars in annual savings.
“Automate your savings and reduce your expenses.”
All is not gloomy: the economy has grown 2.6% on the year in the third quarter, rebounding from two consecutive quarterly declines. With 3.5% unemployment in September, the labor market is solid. The United States added 263,000 jobs in September (although this was the smallest gain in 17 months). And although the annual rise in the average hourly wage slowed to 5% in September from 5.2% in August, it is still one of the fastest increases since the early 1980s.
According to the forecasts of most economists, a recession should not arrive before next year. Americans struggling to pay rent, utilities and groceries have time to boost their savings, experts say. Among their advice: Prioritize the repayment of debts with high interest rates; track your spending, whether you use credit or debit cards or cash; and turn to a non-profit organization like National Credit Counseling Foundation on for-profit debt settlement companies.
In the meantime, think buy generic brandsreduces the number of restaurant meals and purchases of non-essential items, and shop at cheaper supermarkets. “Take advantage of ‘buy nothing’ groups and thrift stores,” Bankrate’s Rossman said. “Reuse what you already have. Do it yourself if you can, or trade your skills and tools with a friend or neighbor. Repair instead of replace. Get another year out of that car, cell phone, or device. Every little gesture counts. »
(This story was updated on November 1, 2022.)
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