Inflation Eats Up Savings
On the eve of the contrived though earnest, America Saves Week (February 27- March 3), the government reported that the personal savings rate, which is the amount of money people have after spending and taxes, stood at 4.7 percent. That’s a far cry from the COVID record high rate of 34 percent in April 2020 (as it turns out, it’s very hard to spend a lot of money on paper towels, disinfectant, and masks), and well below the pre-pandemic level of 8.8 percent for all of 2019.
The pandemic’s impact on the economy and the government’s relief measures has distorted the nation’s savings over the past three-plus years. With lockdowns in place and stimulus and unemployment checks flowing, Moody’s Analytics estimates that U.S. households built up $2.7 trillion in extra savings through the end of 2021. But as inflation accelerated and interest rates rose last year, many lower income earners were forced to eat into those savings and in some cases, began to accumulate debt.
The Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit found that credit card balances increased $61 billion in the fourth quarter, which was the largest observed in the history of the data, which goes back to 1999 and the annual increase for 2022 was $130 billion, the largest annual growth in balances. Does the increase in debt mean that Americans are on the verge of falling back into a debt spiral? Not yet, because the labor market remains strong enough for people to keep making their payments, but the data are flashing some warning signs.
In its blog, the NY Fed pointed out that “there were 18.3 million borrowers behind on a credit card at the end of 2022 compared to 15.8 million at the end of 2019.” While they don’t see widespread defaults, for those individuals who are struggling to make those increasingly costly payments, “this financial distress is real.”
Whether you are digging out of debt or trying to replenish your savings to gather 6-12 months of living expenses, there is no better time than the present to track just how much your spending has increased due to rising prices, post-pandemic splurges, or some combination of both. There are lots of apps that will allow you to track your cash flow or go old school and fire up a spread sheet to see where your money is going. (If you are carrying Federal student loans, don’t forget to factor in those payments for the second half of the year. If the Supreme Court rules that forgiveness can proceed, you will have extra dough, but if they knock it down, you will be prepared.)
If you are paying down debt, establish automatic payments, even for a small amount, and prioritize the highest interest accounts. If you are consumer debt free and focusing on saving, establish automatic transfers from your checking into a savings account, money market account, or a short-term CD. Once you have the emergency fund established, direct what was going into savings and concentrate on retirement, either by increasing what you are contributing through work, or by opening a Roth or Traditional IRA account.