Back in February 2020, before the pandemic hit, the savings rate here was approximately 8.3%. The personal savings rate is defined as “the percentage of people’s income remaining each month after taxes and spending.” In April this year, it had skyrocketed to approximately 33.6%. That would make some sense in that the government was rolling out $1,200 payments to everyone along with the fact that most things were shut down, so there weren’t many places to go or things to spend money on. I couldn’t even get a haircut in April.
The most recent monthly personal savings rate I could find was for August 2020 and it had dropped but still a healthy 14.1%. As we all know, between April and August, the economy gradually began to reopen. You could go out to eat, get a haircut, or go to the movies. People started traveling a bit more as places like Disneyland reopened. But still, 14% is not quite double the savings rate of February. Granted, a lot of things still aren’t fully open, such as international travel and many more are still only partially open.
But still I wonder… I wonder if this pandemic and the rapid pace at which our lives, jobs and consumption changed has made people think that having a little pocket of money tucked away is a good idea. We became hoarders of toilet paper; maybe we are also becoming savers of money. Many economists are viewing this higher savings rate as a good sign for future economic growth, as it is a pool of money people can use to spend as the economy opens up even more when COVID is less of a concern.
I prefer to view it as a long term change in how people view their financial security. For the past 35 years, I have been telling people to have a minimum of 90 days living expenses in a savings account just in case there is an “emergency.” My guess is that for those who were laid off due to COVID, the $1,200 one-time payment and the temporary increase in unemployment benefits went much further if they had an emergency fund. I also believe that for those of us lucky enough to keep our jobs and income, we too have come to see that things can change quickly, and having ready savings can help us get through.
These are the opinions of Legacy Wealth Management, LLC and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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