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Americans are on the brink of financial trouble.
At the beginning of the COVID-19 pandemic, Americans were saving more money. This wasn’t surprising, given the fact that many common areas of spending (like travel and dining out) disappeared. The government was also providing stimulus checks, which helped people sock away more money in their savings accounts.
Unfortunately, this trend has reversed in recent months. Money in savings accounts has gone down, not just compared with the amount people were putting away in 2020, but also compared with the pre-COVID era. And that’s very bad news for individuals and families as well as for the economy as a whole.
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Americans are saving less money
According to the Federal Reserve Bank of St. Louis, the personal savings rate for Americans fell in the third quarter of 2022. During this time, Americans had a personal savings rate of just 3.3%. This refers to savings as a percentage of personal income after accounting for taxes and other expenses.
This 3.3% rate is the lowest personal savings rate since the Great Recession. It’s down from 3.4% the prior quarter. And it is the eighth-lowest personal savings rate recorded since 1947. It also represents a dramatic decline both from the earlier days of the pandemic and prior to it. In fact, this savings rate is 88% lower than during 2020 when Americans were saving more than ever, and it’s 61% below pre-pandemic savings rates.
Americans are not just saving less now, but they are also spending their savings. In the second quarter of 2020, Americans collectively had personal savings of $629 billion. This is only a small fraction of the $4.85 trillion people had saved during the second quarter of 2020 when the government was sending out stimulus money. But it’s also far less than the $1.98 trillion in collective savings in the second quarter of 2021 and the $1.41 trillion in the second quarter of 2019 prior to the COVID-19 pandemic.
Why is this such troubling news?
The huge decline in the savings rate and personal savings most Americans have suggests that people are struggling financially.
This may lead to spending cuts that slow down economic growth and tip the economy into a recession. It could also mean that people who have too little saved don’t have the cash they need to cover unexpected expenses and find themselves in debt when surprise costs creep up. That’s even more likely to happen if people continue to spend down their savings.
The underlying reasons for the decline in savings also show that the economy isn’t healthy for consumers right now. While some people are draining their savings because they are spending more to enjoy post-lockdown life, many others were forced to reduce their account balance to cover essentials because their wages were not keeping up with record-high inflation.
While there is hope that inflation could be cooling, these low savings rates leave many people with no financial cushion in case an impending recession does arrive. If you’ve seen your account balance fall, it may be worth trying to cut back on spending or increase your income (perhaps by taking on a side job temporarily) so you can build your account back up in case you need the cash to see you through an economic downturn.
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