In 2022, the American
personal saving rate fell to a low not seen since
the Great Recession. I think a lot of people
have been just kind of cooped up during the
pandemic times and now we're transitioning plus
inflation. So it definitely has
been a little bit harder. Economists will look at
the savings dynamic and a sort of benign light
savings accrued over the early part of the
pandemic, and that's starting to get spent
down. But on the personal level, though, that's
not a pleasant process. This real time dip in
saving is stressing out a lot of people. 70% say they are stressed
about their personal finances, and that
includes 57% of people earning $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 a lack of
savings. The basic necessities of
life substantially burden your income. It becomes
difficult to save. That said. Americans are sitting
with a lot more savings than they had in the
past. According to bank deposit
records, Americans as a whole are still better
off than they've traditionally been. How much depends on
which side of the income distribution you're on. Regardless, Americans
across the board were drawing down those
savings in the final quarter of 2022. So why did Americans
stop saving and what effect will that have on
this massive group of people that we call the
economy? My name is Mykail, but
the interwebs know me as the bougie budgeter
because I make money easy. I am currently
based in Phoenix, Arizona. The majority of US
households use bank accounts. Mykail
represents one of these households. I do take about 8% of my
total income, and that is to
my 401k contributions. My company matches at
8%. I also try to save an
additional 15% as well as another about
10% of my take home pay I put towards my investing
goals as well. So my personal savings
rate after my take home, I shoot for about a 15%
and I have my savings auto deposited right
into my high yield savings account because
if I do not do that, then I will accidentally
spend it and I am a recovering over spender. And that was my solution
to not overspending. Collectively, Americans
have trillions more in savings than they did
prior to the pandemic. For a broad swath of
Americans, their financial condition is
still probably better than it was
pre-pandemic. But those cash cushions
are deflating for the first time in years. The personal saving rate
reflects how much income Americans hold onto
after their taxes and regular spending. It's basically just the
amount of that that is not consumed. Much of that income,
particularly for what I define broadly as
underserved communities, tends to go toward basic
necessities like housing, food, health care,
transportation. In February 2023, the
personal saving rate was hovering around 4.5%. That's compared to a
long term average of just under 9%. You would see spikes
around the dates when those stimulus checks
were sent out and those were not getting spent. Of course, the other
thing that happened early in the pandemic is
people were not spending money on the things that
they were accustomed to spending on. As inflation has set in,
the monthly savings rate has taken a tumble. This rate only describes
one month of earning and saving. Take a look at
the total deposits held by customers and banks
and you'll see that there is way more value in
people's accounts than any time before the
pandemic. A lot of people would
point to excess savings that occurred early in
the pandemic, something like 2 to 2 and one half
trillion dollars in savings above what we
would have otherwise expected were saved by
American households. Over the past 9 to 12
months, that stash of savings has eroded. It's probably somewhere
in the 1 to 1 and one half trillion range. You had folks across the
country accumulating a bit of a war chest of
savings, and that really has helped to buoy the
economy, particularly in a place like the US
where consumption is such a big part of GDP. The top half of earners
have over $1 trillion in excess savings. That's
nearly three times as much as the bottom half,
according to federal economists. But they
believed the lower half still collectively holds
hundreds of billions in excess savings. By their count, it
breaks down to about 5500 per household. A note
here, this may not mean that you have $5,000 in
spare cash laying around. It may have gone to pay
off that amount in student debt or a
mortgage or a car or to wards your retirement. 37% of Americans have not
touched their pandemic savings and 45% of
Americans either haven't touched it or have taken
out a little bit. But the majority is
intact. Only 17% of Americans
have pretty much exhausted their pandemic
savings, though. That cushion may be
beginning to shrink. Inflation, a nd the
implications for that across categories,
whether it be food, whether it be fuel,
whether it be rents, you're seeing cost
inflation that eats into clearly people's current
income, but also to the extent they have
savings, it also eats into those savings
because everyday things are just more expensive.
And if you think about in a pre-pandemic world
when a typical black family had about five
days of liquid savings, there's not a whole lot
of financial slack in the system to be able to
weather periods of time without income. Economists believe that
the extra savings have so far kept people spending
and the country from recession. At the same
time, a huge swath of the population is living
paycheck to paycheck, according to recent
surveys. Take a look at our poll
of 1000 people across the country. What you'll
find is that 69% are pessimistic about the
current situation in the economy and they're
pessimistic about the future. That's an all
time high. I think the consumer is
doing pretty well. The concern I have is
that the whole world is talking about this
recession that we're going to have, which we
were supposed to have last year. Then we were
supposed to have the first quarter of this
year. Now we're supposed to have it the second
half of this year. Sometimes when you scare
people enough into thinking there's going
to be a recession, they will stop consuming and
it can be a self-fulfilling
prophecy. Federal economists note
that the low interest rates of recent years
are backstopping many Americans. When this
rate goes to zero, the cost to loan out cash
declines. And you can see the
effect playing out on this other chart. Personal interest
payments sank below longer term trend
growth. With these excess savings, the economy
remains strong, but they expect those stockpiles
to dwindle rapidly. These dynamics are
observable around the world. Nearly all
developed countries have declining household
savings. Back in the States, trouble in the
regional banking sector may affect the future
direction of interest rates. The Fed is trying to slow
down the economy. That reduction in
lending by regional banks might very well do that
work for them, which means that we may be
near the end of interest rate hikes. The Fed's interest rate
can affect how much money you make from saving. When the rate goes up,
putting money away becomes more valuable. But if it goes down,
that could change what your account offers in
terms of interest when you are in. A rising interest rate
environment. Savings rates do tend to
lag that process. So right now the Fed has
rates close to 5%. I doubt that very many
people can get a 5% savings rate on a
typical savings or checking account. It's a lot happening
right now. People are losing jobs. There's just so much
happening that it's okay if you're not having a
15% savings rate, but just as long as you're
starting somewhere. There are many different
ways to save your money, but different methods
can generate returns for you as a saver in the
form of interest. There's no easier way to
save money than to have money taken out of your
paycheck before you get it and have it go into a
retirement plan That's either getting a tax
deduction plus tax deferral, or it may just
be tax free for life if it's a Roth. But either
way, the money's taken out first. Cash stored under your
mattress effectively delivers a negative
return, at least when the US 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
routinely offer low returns. By contrast,
high yield savings accounts can deliver
much more in interest. The national average is
incredibly low. I'm high yield all the
way, especially for any dollars that I'm trying
to save. I suggest always any
short term savings, any long term savings. I'm
not a fan of leaving in a savings account, but
anything that's between six months to 24 months
leave it in a high yield savings account. The national savings
interest rate was less than 1% in 2023, but
some high yield accounts were netting 4%. That's much better than
in the past, but still lower than inflation. And you may be shocked
that you're still getting 0.1 or 0.3% and you can
easily get north of 4% without
taking any undue risk on your cash. That's a game
changer. But not every bank offers
a high yield option and not everyone seeks them
out. Roughly 6 million Americans were unbanked
in recent years. This means they don't
use checking or savings accounts. The most
common reasons were lack of funds, or they simply
don't trust banks. You've got to reset the
thresholds to make sure banking is not
burdensome to these individuals,
particularly for folks who have lower income,
lower net worth, to the extent that they are
banked, their money sits in checking and savings
accounts. I think it's probably the
case that a lot of families are leaving
some money on the table. A high yield account is
going to also offer a better rate than you
might get with a typical savings account. You might often have 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 just like me, and she
had a high yield savings account back in like
2006 when the high yield savings rate was like
8%. Banks are offering higher
returns for two reasons. Number one, they're
competing for your business. And number
two, the interest rate hikes out of the Fed
make it easier for them to lend to you at a
favorable rate. Smaller banks often use
this strategy to build their deposits. Even companies like
Goldman Sachs have used this tactic, and
companies like Apple are getting into the game as
well. Other products, like certificates of
deposit, can make your money work for you. I actually got my first
CD by myself without my mom. I was like, You
know what? I'm probably not going
to use this until I graduate and I'll let
that mature. And I know that that
rate is locked in, which is a lot different from
a regular savings account where that rate is not
locked in a. CD usually carries a
higher interest rate, but it also has a fixed
term. So your money is going
to be tied up in that product until the term
ends. So there is a give and
take there. But I think for a lot of
households, if they have the cash to invest over
a certain period of time, the CD is a really good
option right now. But no matter how you get
it done, saving it all is a good start. Compound interest is
real. So to the extent that
you can put some amount away, even if it's below
the threshold that you had set out maybe a year
ago or two years ago when the environment looked
very different. That's okay. Don't be hard on
yourself. Saving a dollar today is still more than
saving $0 today. So if you can only start
small, start small and let that habit grow,
you're still doing amazing.
