By Quentin Fottrell
Financial advisors offer their top tips for boosting savings as economic uncertainty rises
As the red flags go away, that’s a big deal.
The personal savings rate – that is, personal savings as a percentage of disposable income, or the share of income left over after paying taxes and spending money – fell to 3.3% in third quarter against 3.4% in the previous quarter, the government announced on Thursday. . This is the lowest level since the Great Recession and the eighth lowest quarterly rate on record (since 1947). Adjusted for inflation, savings are down 88% from their 2020 peak and 61% lower than before the pandemic.
Americans’ personal savings have plunged this year, hitting $629 billion in the second quarter of 2022, according to the Federal Reserve Bank of St. Louis. That’s down from $1.98 trillion in Q2 2021 and $4.85 trillion in Q2 2020, when boosted by COVID-related government cash. But it’s also down from $1.41 trillion in the second quarter of 2019, before the coronavirus pandemic brought the economy to a halt and sparked a wave of government benefits.
Mingli Zhong, a research associate at the Urban Institute, a Washington, D.C.-based think tank, said people will either start cutting back on their spending, which could eventually help lower prices, or deplete their savings by spending most of their income. In the latter scenario, the United States would likely tip into another recession, she added, which many economists are already forecasting for 2023. “More households with little savings would have little protection against a recession.” , Zhong said.
What happened? A combination of wages not keeping up with inflation and people letting loose after being locked down during the pandemic. “Many people’s shopping habits froze, even when people were stuck at home and the only person they could see on a daily basis was Amazon’s delivery guy,” said Janet Lee Krochman, CPA. Costa Mesa, California. says MarketWatch. And now? “I think the gloves are off and people are playing catch-up.”
After the worst days of the pandemic, Americans wanted out. “People want to relive life and create happy memories to help replace those who aren’t so kind they have from pandemic years,” Krochman said. Credit card debt reached $887 billion in the second quarter of 2022, according to the Federal Reserve Bank of New York. That’s a 13% increase on the year – the biggest annual increase in 20 years.
The pandemic, however, has left millions of American workers in a vulnerable state – essentially one paycheck away from living on the streets. For one thing, stimulus checks led to a record drop in the number of U.S. households without bank accounts last year. The number of unbanked households fell to 5.9 million last year from 7.1 million in 2019. Meanwhile, Americans’ ability to pay their bills on time fell for the first time in five years. , according to a recent report.
How to boost your savings
And now ? Krochman recommends automatic drafts from checking accounts to high-interest savings accounts, “if you can’t have [money] removed from your paycheck in an employer-based type of plan. “Keeping money ‘out of sight’ also keeps it ‘out of mind’ and helps prevent impulse spending, she adds. And the 401(k) contribution limit will jump almost 10% in 2023 A good 401(k) plan comes with company matching, as well as low-cost investment options and low fees.
Others agree with this approach. “Move money with each paycheck into a separate savings account,” said Ted Rossman, senior industry analyst at Bankrate.com. “Some of these returns are over 3% now. For example, UFB Direct and Dollar Savings Direct,” he said. “These are the highest savings rates we’ve seen in years. You’re less likely to miss what you don’t see. Pay yourself first.” (A recent Bankrate survey found that only 27% of people saved six months of expenses.)
Another tactic: look for a better paying job, ask for a raise or take a side hustle, Rossman said. “Sell things you don’t need. Ditch lightly used subscriptions. Cutting a recurring monthly expense has 12 times the impact of doing the same thing once. Negotiate lower prices. I recently called my cable company/internet/telephone and satellite-radio provider and realized substantial savings just by asking for a break.That’s hundreds of dollars in annual savings.
All is not gloomy: the economy grew 2.6% year on year in the third quarter, rebounding from two consecutive quarterly declines. With 3.5% unemployment in September, the labor market is solid. The United States added 263,000 jobs in September (although this was the smallest gain in 17 months). And although the annual rise in the average hourly wage slowed to 5% in September from 5.2% in August, it is still one of the fastest increases since the early 1980s.
According to the forecasts of most economists, a recession should not arrive before next year. Americans struggling to pay rent, utilities and groceries have time to boost their savings, experts say. Among their advice: prioritize paying off high-interest debt; track your spending, whether you use credit or debit cards or cash; and turn to a nonprofit organization like the National Foundation for Credit Counseling rather than for-profit debt settlement companies.
In the meantime, consider buying generic brands, avoid eating out and buying non-essential items, and shop at cheaper supermarkets. “Take advantage of ‘buy nothing’ bands and thrift stores,” Bankrate’s Rossman said. “Reuse what you already have. Do it yourself if you can, or trade skills and tools with a friend or neighbor. Repair instead of replacing. Get another year out of that car, cell phone, or device. Every little bit counts.”
Yes, you can prepare for a recession, even if you’re struggling to pay rent, utilities, and groceries. Follow these steps now
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