Americans Are Struggling to Save Again | Smart Change: Personal Finance

(Adam Levy)

Personal savings rates in America rose higher at the start of the pandemic. The combination of government stimulus controls, the inability to go out or travel, and economic uncertainty have led to savings rates climbing far into the double digits. Before the pandemic, Americans’ savings rate was between 7% and 8%.

But Americans are once again struggling to save. Savings rates fell below the pre-pandemic average, reaching 5.4% in May, according to data from the St. Louis Federal Reserve. There are several factors at play, some of which you may have control over. If you want to keep your budget and retirement on track, your savings rate may be one of the most important factors to keep track of as you make your plans.

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Where America Spends

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There are several factors that influence saving and spending. The biggest at the moment appears to be inflation. The personal consumption spending index increased by 6.3% year-on-year in May. Excluding fuel and food costs, the index continued to rise by 4.7%.

With the high inflation rates, Americans have actually cut back on gasoline and food for home consumption, but still have to pay more in nominal dollars. If real wages do not keep pace with inflation, it makes it difficult to save. The graph shows where consumer spending has increased and decreased.

Data Source: U.S. Bureau of Economic Analysis.

That said, many are spending more as a result of easing restrictions following the broad-based vaccine deployment from 2021. Year-on-year, spending on both goods and services has increased last summer, overcoming the period of more intense restrictions in 2020.

Americans are also feeling the pinch of increasing housing and utility spending and health care costs. These are mostly unavoidable expenses. Both saw significant increases in spending, which exceeded average inflation rates.

The importance of your savings rate

If you are lucky enough to earn a substantial income but are still struggling to save money, now is a good time to reconsider your budget and priorities. Even if you bring home a good salary, if you do not have room in your budget for inflation, it can be a disaster for your personal finances.

The higher your savings rate, the easier it will be for you to absorb inflation. This is because inflation only affects your spending. For example, if you save 50% of your income and inflation is 10%, you can still save 45% of your income. On the other hand, if you only save 7% of your income and inflation is 10%, you are now actually forced to find ways to cut purchases if you do not get a salary increase.

Also keep in mind that the retirement equation has two sides. The first is how much money you save and invest. These are the funds you will rely on to fund your retirement.

The other side is how much you spend each year. You need to save enough money to cover the cost of your lifestyle. The more you spend, the more you have to save.

But the more you spend, the less you save by definition. Savings are what is left after you spend. As your savings rate declines, you will need to work longer or take greater investment risks to reach your required retirement retirement goal.

Maintaining a high savings rate is one of the best things you can do for your personal finances in both the near and long term. While inflation certainly hurts, now may be the most appropriate time to analyze your personal spending habits and find out what adds the most value to your life, as well as what you might be able to do without.

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