Where Did Americans’ Savings Go?

In 2022, the American personal

savings

rate fell to a level not seen since the Great Recession. I think a lot of people have been a little bit cooped up during the time of the pandemic and now we are in a transition plus inflation. It's definitely been a little more difficult. Economists will analyze the dynamics of

savings

and a kind of slight and benign savings accumulated during the first part of the pandemic, and which is beginning to be spent. But on a personal level, however, that is not a pleasant process. This real-time drop in savings is stressing many people out. 70% say they are stressed about their personal finances, and that includes 57% of people who earn $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 lack of savings. The basic necessities of life place a substantial burden on your income. It becomes difficult to save. Said that. Americans have much more savings than in the past. According to bank deposit records, Americans as a whole remain better off than traditionally. The amount depends on which side of the income distribution you are on. Anyway, Americans overall were withdrawing those savings in the last quarter of 2022. So why did Americans stop saving, and what effect will that have on this massive group of people we call the economy?

My name is Mykail, but I'm known on the internet as the budgeter because I make easy money. I currently reside in Phoenix, Arizona. Most American households use bank accounts. Mykail represents one of these homes. I take about 8% of my total income, and that's for my 401k contributions. My company matches 8%. I also try to save an additional 15%, as well as another 10% of my take-home pay that I also put towards my investment goals. So my personal savings rate after I go home, I shoot up to about 15% and I automatically deposit my savings directly into my high-yield savings account because if I don't do that, I'll accidentally spend it and recover. excessive spender.

And that was my solution to not spend more. Collectively, Americans have trillions more in savings than before the pandemic. For a wide swath of Americans, their financial situation is likely still better than before the pandemic. But those cash reserves are deflating for the first time in years. The personal savings rate reflects how much income Americans retain after taxes and regular expenses. Basically it is the amount that is not consumed. Much of that income, particularly in what I broadly define as underserved communities, tends to go toward basic needs like housing, food, health care, and transportation. In February 2023, the personal savings rate was around 4.5%.

This compares to a long-term average of just under 9%. You would see spikes around the dates those stimulus checks were sent out and not spent. Of course, the other thing that happened at the beginning of the pandemic is that people weren't spending money on the things they were used to spending money on. As inflation has risen, the monthly savings rate has fallen. This rate only describes one month of earnings and savings. Take a look at total customer and bank deposits and you'll see that there is much more value in people's accounts than at any time before the pandemic.

Many people would point to the savings glut that occurred early in the pandemic, something like $2 to $2.5 trillion in savings above what we would have expected American households to save. Over the past 9 to 12 months, that nest egg has eroded. It's probably in the range of 1 to 1 and a half billion. There were people all over the country building up a kind of savings bank, and that has really helped boost the economy, particularly in a place like the United States,

where

consumption is such a large part of the GDP. The top half of earners have more than $1 trillion in excess savings.

According to federal economists, that's nearly three times more than the bottom half. But they believed the bottom half still collectively hold hundreds of billions in excess savings. By their calculations, it breaks down to approximately 5,500 per household. A note here: This may not mean you have $5,000 in extra cash lying around. That amount may have gone toward paying off student debt, a mortgage, a car, or toward your retirement. 37% of Americans have not touched their pandemic savings and 45% of Americans have not touched them or taken out a little. But most are intact. However, only 17% of Americans have virtually exhausted their pandemic savings.

That cushion may be starting to shrink. Inflation, and the implications that this has across all categories, whether it's food, fuel, rents, we're seeing cost inflation that clearly affects people's current income, but also the extent to which they have savings. It also eats into those savings because everyday things are simply more expensive. And if you think about a pre-pandemic world, when a typical Black family had about five days of liquid savings, there's not a lot of financial slack in the system to get through periods of time without income. Economists believe the additional savings have so far kept people spending and the country out of recession.

At the same time, a large portion of the population lives paycheck to paycheck, according to recent surveys. Take a look at our survey of 1,000 people nationwide. What you will find is that 69% are pessimistic about the current state of the economy and are pessimistic about the future. That's an all-time high. I think the consumer is doing quite well. The concern I have is that everyone is talking about this recession that we are going to have, that we were supposed to have last year. So we were supposed to have the first quarter of this year. Now we are supposed to have it in the second half of this year.

Sometimes when you scare people enough into thinking there is going to be a recession, they will stop using and it can become a self-fulfilling prophecy. Federal economists point out that the low interest rates of recent years are supporting many Americans. When this rate reaches zero, the cost of lending cash decreases. And you can see the effect in this other graph. Personal interest payments fell below the long-term growth trend. With this excess savings, the economy remains strong, but they expect those reserves to dwindle quickly. These dynamics are observable throughout the world. In almost all developed countries, household savings are declining.

Back in the United States, problems in the regional banking sector may affect the future direction of interest rates. The Federal Reserve is trying to slow the economy. That reduction in lending by regional banks could well do that job for them, meaning we may be near the end of interest rate increases. The Federal Reserve's interest rate can affect the amount of money you earn by saving. When the rate goes up, saving money becomes more valuable. But if it goes down, that could change what your account offers in terms of interest when you're in a rising interest rate environment.

Savings rates tend to slow that process. So right now the Federal Reserve has rates close to 5%. I doubt many people can get a 5% savings rate on a typical checking or savings account. There's a lot going on right now. People are losing jobs. There's so much going on that it's okay if you don't have a 15% savings rate, but as long as you start some

where

. There are many different ways to save money, but different methods can generate returns for you as a saver in the form of interest. There is no easier way to save money than to deduct money from your paycheck before you receive it and put it into a retirement plan.

That's getting a tax deduction plus a tax deferral, or you can just be tax-free for life if it's a Roth. But either way, the money is withdrawn first. Cash stored under the mattress effectively generates a negative return, at least when the United States 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 typically offer low yields. In contrast, high-yield savings accounts can earn much more interest. The national average is incredibly low. I am a high performer at all times, especially on the dollars I try to save.

I always suggest any short-term savings, any long-term savings. I'm not a fan of leaving it in a savings account, but anything between six months and 24 months leave it in a high-yield savings account. The national savings interest rate was below 1% in 2023, but some high-yield accounts were earning a net profit of 4%. That's much better than in the past, but still lower than inflation. And you might be surprised to know that you're still getting 0.1 or 0.3% and you can easily get to 4% without taking any undue risk on your cash. That's a turning point. But not all banks offer a high-yield option and not all seek it.

Approximately 6 million Americans were unbanked in recent years. This means they do not use checking or savings accounts. The most common reasons were lack of funds or simply not trusting banks. Thresholds must be reset to ensure that banking is not a burden for these people, particularly for people who have lower incomes and lower net worth, as long as they are banked, their money is in checking and savings accounts. I think a lot of families are probably leaving some money on the table. A high-yield account will also offer a better rate than you could get with a typical savings account.

Often, you may need 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 like me, and she had a high-yield savings account back in 2006, when the high-yield savings rate was like 8%. Banks offer higher returns for two reasons. Number one, they are competing for your business. And number two, interest rate increases by the Federal Reserve make it easier for them to give you loans at a favorable rate. Smaller banks often use this strategy to generate their deposits. Even companies like Goldman Sachs have used this tactic, and companies like Apple are also getting into the game.

Other products, such as certificates of deposit, can make your money work for you. In fact, I got my first CD by myself and without my mother. I was like, You know what? I probably won't use this until I graduate and let it mature. And I know that rate is fixed, which is very different from a normal savings account where that rate is not fixed. The CD usually has a higher interest rate, but also has a fixed term. Therefore, your money will be tied up in that product until the term ends. So there's a give and take there.

But I think for many households, if they have the cash to invest for a certain period of time, CDs are a very good option right now. But no matter how you do it, saving everything is a good start. Compound interest is real. So to the extent that they can save a certain amount, even if it's below the threshold that they set maybe a year or two years ago, when the environment looked very different. Alright. Don't be hard on yourself. Saving a dollar today is still more than saving $0 today. So if you can just start small, start small and let that habit grow, you're still doing great.