As Americans adjust their spending habits in a rapidly changing economy, they are building cash reserves at an unprecedented rate.
The Bureau of Economic Analysis reported on May 29th that the personal savings rate hit a historic 33% in April. To put that into perspective, it’s the highest number since the Bureau started tracking personal savings in the 1960s.1
Economists are struggling with the question, “When will consumers be confident enough to start spending some of that cash stockpile?”
Optimists say the stockpile was due to “forced savings.” Staying home has led to less spending overall, on everything from clothes to commutes. As soon as restrictions loosen, that money could flow back into the economy.
On the other hand, pessimists may say that until virus fears drop and the unemployment rate improves, consumers will continue to conserve cash as a response to tremendous economic uncertainty.
I believe there is some merit in both schools of thought and will be watching the personal savings rate alongside other economic indicators to see what, if any, long-term trends emerge. Although we are discussing mass trends throughout the US, it is important to consider what is appropriate for your situation. Here are some things to consider regarding your money use during these times:
1. Create a Budget and Track your Spending. If you do not have a budget or a way that you are tracking how you spend your money, now is a good time to start. When money gets tight, how will you know where to cut back if you don't know what you are spending? This will also help with the second point.
2. Have an adequate and appropriate Emergency Fund. You want to have 4-6 times your monthly expenses in a savings account for emergencies. Note that "monthly expenses" count as anything you pay in order to keep your household functioning. During these times of elevated uncertainty, saving an extra month or two's worth of expenses isn't a bad idea, just don't go overboard. Remember that you have long-term goals as well, and that putting too much into savings while ignoring investing could hamper attaining those goals.
3. Review your Insurances.Particularly your Life, Medical and Disability insurances. Also, if you are over the age of 50, Long-term Care insurance. Knowing the ins and outs of these policies can help you in the time that they are needed. Don't have one or multiple of these? Talk to a finance professional to get assistance.
4. Review your long-term finance goals. This is crucial for you to reach goals like saving for a home, college, or retirement. If you are able to consistently invest for those things, especially during the times we are in, you will thank yourself. Again, if you are struggling with your goals or don't know how to make them, consult a professional to help get you on track.
1. CNBC.com, May 29, 2020
An Unprecedented Rush to Cash
June 12, 2020