• Bernhardt Wealth Management

Americans Are Saving More During the Pandemic: Is That Good or Bad?

In our work with clients, it is very common for us to recommend that most people increase their rate of savings. Whether it is “maxing out” their contributions to their IRAs or 401(k) plans, building up their emergency fund or investment account, or contributing to a higher-education savings account for children or grandchildren, urging people to save more is a frequent refrain in much of our financial counseling.

For one thing, Americans, by and large, are typically poor savers, often ranking in the bottom half of savings rates for developed nations. Reasons for this range from easy access to consumer credit in the United States to our heightened culture of materialism and the marketing that goes with it: Americans are inundated with messaging intended to motivate spending.

But during the pandemic, rates of saving in the U.S. have skyrocketed. For years prior to the onset of the pandemic, the U.S. savings rate was trending in its usual range of 6–8%. And then, in February 2020, the rate rocketed to almost 34%, before falling to its current level of around 14%—still quite high by historical standards. To a certain extent, this actually makes sense; Americans—and perhaps people everywhere—tend to save more when they feel that the future is uncertain. Of course, this effect differs greatly according to income. More affluent Americans, who enjoy higher levels of discretionary income, are driving most of the increase in the savings rate. Poorer Americans, who typically live paycheck to paycheck and struggle to save under the best of circumstances, have not increased their rate of savings appreciably.

It is also revealing that the principal areas where spending has decreased during the pandemic are not, as in past recessions, focused on big-ticket or luxury items like automobiles, new homes, but rather on expenses that require in-person interactions, like restaurants and hair salons. During the shutdown in the early spring, consumer spending fell by more than 12%.

So, is this decrease in spending and the concurrent rise in savings a good thing or a bad thing? It’s pretty hard to question the wisdom of “saving for a rainy day,” and 2020 has certainly seen more than the usual amount of rough weather. For that reason, it’s hard to blame anyone who is socking away more cash during these uncertain times. On the other hand, consumer spending accounts for about 70% of the U.S. economy, so a prolonged, dramatic decrease in spending would likely provide a significant obstacle to the post-pandemic economic recovery. Some may recall when President George W. Bush, with a recession looming in 2006, told Americans to “go shopping more.” With an economy as consumer-driven as that in the United States, if consumer spending falls too much for too long, serious problems can result.

Time will tell whether U.S. consumers will be able to negotiate the balancing act between appropriately building up their savings and providing the necessary fuel for an economic recovery. But if you would benefit from expert guidance regarding your saving, spending, or long-term financial plans, we would be very happy to hear from you. And to learn more, you can read our recent article, “The Importance of Stress-Testing Your Wealth Strategies,” by clicking here.

Buen Camino!

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