“I’m worried,” says the top economist
Amid heightened economic uncertainty, Americans are saving less overall.
The personal savings rate — how much people save as a percentage of their disposable income — was 3.9% in August, well below a decade-long average of about 8.9%, according to the latest data from the U.S. Bureau of Economic Analysis.
Still, consumers continue to spend, which has contributed to economic growth and could ultimately be the reason the country enters recession after all, despite more than a year of dire forecasts.
“If you’re confident about the future, you don’t need such a high level of savings,” said Diana Feargott-Roth, an economics professor at George Washington University and former chief economist at the U.S. Department of Labor.
That doesn’t mean consumers are in the clear. In fact, many have problems that are just as big or even bigger than before.
When the Covid pandemic brought the economy to a standstill and the US government released trillions in stimulus money, American households were suddenly sitting on a cache of cash.
“It was the first recession in U.S. history in which disposable income increased,” said Tomas Philipson, a political science professor at the University of Chicago and former acting chairman of the White House Council of Economic Advisers.
But these cash reserves have now largely been used up after consumers gradually used up their excess savings from the Corona years.
Rising inflation in the wake of the pandemic made it harder to make ends meet. At the same time, the Federal Reserve’s most aggressive rate-hiking cycle in four decades made it more expensive to borrow.
“I’m worried,” Philipson said. “People are affected on both fronts – lower real wages and higher wages.”
That makes it particularly difficult to set aside money, said Winnie Sun, co-founder and managing director of Irvine, Calif.-based Sun Group Wealth Partners and a member of CNBC’s Financial Advisor Council.
“Some are working on tighter household budgets and have not adjusted their spending as much in line with the rise in inflation, so they have not been able to save more even though they knew they had to.”
According to a Bankrate study, nearly half (49%) of adults have less or no savings compared to last year Opinion poll.
More than a third now have more Credit card debt Another Bankrate survey found they have more than cash reserves, the highest on record, and 57% of adults said they couldn’t afford a $1,000 emergency expense.
According to an analysis by , the average American’s savings are 32% below what they should be compared to their salary DollarGeek based on data from the Fed’s Survey of Consumer Finances.
You’ll probably need more cash than you think
Recession or not, Experts say having a cash reserve is crucial.
While most recommend having three to six months’ worth of cash on hand to weather a job loss or other economic disruption, that’s probably not enough, according to Preston Cherry, a certified financial planner and founder and president of Concurrent Financial Planning in Green Bay . Wisconsin.
Today, households should try to finance double the usual amount, he advised.
If there is an economic downturn, there is a good chance that it will last for a while. Over the past half century, recessions have lasted anywhere from two months to more than 18 months.
“Having emergency funds in place helps make the process easier,” said Cherry, who is also a member of CNBC’s advisory board. “The good news is that recessions eventually end and there is hope, recovery and upside potential.”
Pay off your debts as a first precaution
Before you can build a decent savings cushion, it’s crucial to prioritize paying down debt, Sun said.
“Saving while in debt is like swimming in the pool with a broken arm – you’re effectively not getting very far.”
Start by paying off any high-interest debt, such as: Sun recommends paying off credit cards as quickly as possible, even if that means getting a temporary job or a part-time job.
“Once your debt is under control, focus on building your emergency fund, either at the same time or immediately afterward.”
Where you can effectively save money
Even when Americans have an emergency fund, most say they don’t know how best to save to meet their short- or long-term savings goals, studies show.
Nowadays, Savers could get better returns on their money than they have in years.
After a series of rate hikes by the Federal Reserve, interest rates on highest-yielding online savings accounts are now as high as 5%, the highest since 2008, according to Bankrate.com.
“The easiest thing to do,” CFP Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta and a member of the FA Council told CNBC, “is to think about transferring money from your checking account to a savings account.”
Alternatives like Treasury bills, certificates of deposit, or money market accounts have also emerged as competitive cash options, although this may mean tying up your savings for a few months or longer.
Jenkin recommends buying short-term, relatively risk-free government bonds and staggering them to ensure you get the best interest rates. This strategy involves holding the bonds until the end of their term.