Last week, our CEO and Founder, Jean Chatzky, posted on both her Twitter and Instagram accounts about the all-time-high savings rate the country has hit, thanks to stay at home orders. We’re at a whopping 33%, up from a rate of 12.7% in March, which beat the previous record (by a landslide, I might say) of 17.3%, set in May of 1975.
How’d we get here? Let’s start with the increased unemployment benefits thanks to the additional $600 per week supplement from the federal government. Many individuals, specifically those who are unemployed, are making more money with unemployment benefits than they would have if they were working a job.
Pair that with the fact that people just aren’t spending right now: “People had fewer places to spend, so they didn’t spend as much,” notes Matt Schulz, Chief Credit Analyst Lending Tree. Very few people have been shelling out cash for bigger ticket items, like airfare and hotels, and being home has forced communities away from restaurants and all forms of in-person shopping. Without those expenses, there’s more room to save.
Then you add bills and monthly payments into the mix — because of the uncertain financial station so many Americans are in, relief on bill payments has been common in this pandemic. When you don’t have to pay your bills, and you have nowhere else to go, that money goes into your savings account. At least it should.
And voila, it’s a savings haven.
But while the high savings rate is great for individuals, it definitely is a contributing factor to a hurting economy. Why? Well, if people aren’t spending, the economy takes a hit. As the Carnegie Endowment for International Peace puts it, “after all, one person’s spending is another person’s income.”
Don’t get us wrong — it’s always a good thing when people save for the future, but when we look at the money flowing in and out of the economy in the here and now, we’re in trouble. The fact that people are suddenly saving so much more also says that they aren’t ordering dinner as often from their local Italian joint… They aren’t supporting their indie bookstore as fervently as they were a few months ago… they aren’t treating themselves to that dress they’ve been eyeing. Again, saving money is a good thing, and it’s no secret that Americans are woefully behind when it comes to things like emergency savings, which we desperately need to change. But in times like these when the economy is already suffering, having people pull back on their day-to-day spending can hurt small business owners, kill retail establishments, and alter the way the daily economic engine of our country churns. The trick is always finding that balance of saving just enough so that we’re all prepared for a rainy day, (and for retirement, whenever it comes) and spending enough so that existing businesses can continue to survive — and hopefully thrive.
But a savings rate like this won’t last forever. David Laibson, professor of economics at Harvard University, attributes this increase to the specific circumstances the country faces right now rather than an actual change in attitudes. When people are worried and are unsure of what the future might hold, they’re likely to save more. Next week could bring a salary reduction, a lay off, or a new case of COVID-19 that has to be paid for. How do we ensure we can face those challenges? We save.
The additional $600 weekly federal supplement to unemployment benefits is set to expire at the end of July, and there’s no clear update as to whether it may be extended in some form, explains Schulz. And now that states are starting to open up, we’re about to have more places to spend, especially when we’ve been itching for a meal in a real restaurant for almost four months. (Clinking glassware! A napkin that’s not a paper towel! Not having to cook!) Plus, you have to check the fine print when it comes to the fine print of the bill-paying agreement you made with your landlord or credit card company or wifi supplier: There’s a difference between pausing your bills and not having to pay them all together. Meaning, you might have months of bills to pay when this pandemic finally comes to a close.
The overall savings rate for May 2020 has yet to be released, but Schulz anticipates the rate will start to drop as the country opens up and people head back out into the retail landscape. But that’s okay, he says. “It’s great that people are putting money away because if we have learned anything from the pandemic, it should be just how important rainy day funds really are,” he says. “We hope people learn the importance of saving. Even if they are not saving at the same rate as they were the last few months, if people can ramp up their savings a little more [going forward], it will serve them well.”
LET’S TACKLE THE NEXT STEP… TOGETHER.
- Stop settling for paltry interest rates on your savings. Compare high-yield savings accounts and put your money to work making more money today.
- Rome wasn’t built in a day and nor should your emergency fund: Here are four easy ways to start saving today.
- Answer these five questions to calculate out how much is enough to have on hand for financial “uh ohs.”
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