Well folks, clearly Americans are splurging like it’s 1999 or like never before as savings rates are back to marginal levels hanging on for dear life.
If there’s one thing Americans are good at, it’s exuding FOMO and living on the edge! Planning for the future seems to be impossible for the majority of Americans while Netflix and chilling for 2 hrs each night is the norm.
I’ll give average Americans the benefit of the doubt. We just endured the most frothy speculative insane market with savings rates as high as 30% so you can be proud of yourself for surviving financially and hopefully are physically in shape.
After all, millions of Americans got wealthier. Until now.
With the Fed finally shrinking its balance sheet after exorbitant amounts of MBS and gov’t bonds were pumped into the economy for the past 2 years, the Fed and Congress are eyeing inflation like a hawk, and the Fed’s mighty job of engineering a soft landing with no recession in sight is their top priority.
Luckily, there are already hopeful signs inflation may have peaked. The 10 and 30-year Treasury yields slide last week and the Dow and S&P 500 finally inched out of bear market territory and snapped their losing steak that made investors scrambling for the past 7 weeks.
The Fed’s job may already be done thanks to Americans’ anticipated frivolous spending habits, savings rates, and supply chains easing.
Why A Low Savings Rate May Be Healthy for The Economy
To be clear, as an individual, no matter how old you are, past 18, you should already be establishing a bullet-proof emergency fund. As you grow your passive income sources and start building a family when humans are reliant on you to provide them a comfortable living, it is non-negotiable to create a cash-only fund that covers 6–12 months + of living expenses.
No matter what don’t sabotage yourself and stick it into Savings I Bonds that pay a staggering 9%+ but have a lock-up period for over a year or any money-market fund for a slightly higher interest to then back out.
Plan for the Worst, Hope for Anything
As a female, I can tell you the men reading this likely disagree the most about my emergency fund allocation. Due to their risk aggressive appetite and predicted shorter age length, they have a tendency to not plan as well as women do.
Even last year at the boom of the market when I randomly asked a male teller at the bank how much they thought would be appropriate to keep in cash right now, the guy said only a few bucks! I asked the same guy the other day and they said only a month or two if you have no kids!
Good thing I didn’t follow his advice. They would prefer to manage it and chop a 1% fee from it instead of it sitting in cash for free.
As a personal finance advocate, blogger, entrepreneur, and mentor, part of my mission is to break the gender, racial, and wealth gap and destigmatize the taboo around personal finance. Only if the financial industry had more women and a more diverse representation, in general, I believe there would be fewer bankruptcies, better-trusted advice, less dependency, more logical reasoning, equal distribution of wealth, and preparedness around the globe. Hopefully, this can be achieved in my lifetime!
As they say, it’s always good to have a little more than a little less especially as finances are the top concern for Americans and what over 75% think about on a daily basis. Stop causing psychological damage to yourself by just saving a little more per month.
Save Less to Gain More Later On?
Pitifully low savings rates are back at 4.4% of disposable income per month, a low not seen since the 2007–08 financial crisis when many Americans had the majority of their net worth tied to the value of their primary residence that they didn’t even own! Although that’s a drastic mistake, they had a reason to not save that much because they didn’t have the cash to withdraw in the first place!
In this looming recession and on the brink of a bear market, it would be illogical to assume the good times last forever. That is good and bad news. Eventually, there will come an end where the truth will hit the fan, and investors, homeowners, and Americans, in general, would need to create a buffer in case they invest in companies that are worth billions with no production in sight.
Although lower savings rates are dangerously concerning given the Fed’s audacious tightening plans and looming recession fears, Wells Fargo analysts estimate Americans are sitting on an extra $2.3 trillion in savings to burn but per individual it is still tight and not right.
The Savings Bust
Lower savings rates aren’t good for anyone. Even bad spending and defaults can trickle up to wealthier Americans who can feel the pressure in deposits.
But if there’s one hopeful sign, I’ll give you this.
Lower savings rates mean eventual lower spending to naturally curb inflation.
With less cash and liquid investments on hand, presumably Americans will realize that they don’t have a large enough buffer to spend and rely on when the unexpected expected comes and to spend on what they missed out on during the pandemic.
It is a worrisome sign planning for the worst & hoping for the best isn’t on Americans’ minds. They can suffer greatly if and when a bear market hits.
After all, the best time to spend and live it up maybe during a bear market and recessionary times when hopefully inflation hits a target rate of ~2%, your cash hasn’t eroded, and things are less crowded, crazy, and canceled such as in today’s airports.
Go against the norm to enjoy the most. If you do things others aren’t willing to do, you will receive what no one else has.
Set up a buffer and plan accordingly during good times to enjoy it even more if something occurs. It makes you feel proud like a fortune teller, able to predict what the next few months may have in store when in reality, ups and downs are expected eventually, you just faced the fear earlier than most. The economy and market cannot stay heated forever. It isn’t healthy either.
Instead of living it up in the present, make sure to plan your investments, capital allocation, and time accordingly. You’ll feel 10x better now and when you are thriving when it is least expected.