The turbulent economic recovery from COVID is moving forward, but inflation and record debt are now eating away at Americans’ excess savings.
Low-income Americans, in particular, are seeing their savings dwindle or even be depleted, The New York Times reports. “For them, the economic recovery is looking less buoyant.” The data is more evidence of an uneven economic recovery and is likely to come as a gut-punch for millions.
Savings in COVID's Early Days
Economists define COVID-19 excess savings as money above what they would have normally saved. The lockdowns and work-from-home mandates imposed during the pandemic of the past two years meant people were no longer going out to eat, traveling, vacationing, entertaining or dressing up for work. Furthermore, millions of working Americans and small businesses received COVID-19 stimulus checks from the government. Those on unemployment saw their benefits extended by TKTK months.
The Times reports that during specific periods, like April 2020, when the first wave of COVID was ravaging the country, savings spiked.
Now, unfortunately, those reserves are declining significantly. Moody’s Analytics projects “these excess savings among many working- and middle-class households could be exhausted as soon as early next year,” harming not only Americans’ savings, but the wider economy as well.
As the federal supplement to unemployment expired in September and no new stimulus checks are expected soon, Americans are increasingly feeling the pinch in their bank accounts.
Add to this the ongoing issue of inflation and spiking energy prices, and the picture gets even gloomier.
Low-income Americans’ savings, in many cases, are running on empty. JP Morgan Chase Institute recently assessed that low-income families “experienced the greatest percent gains during each round of stimulus—yet also exhausted their balances faster.” This has led to a predictable but unfortunate result: Wealthy Americans have managed to save the most and accumulate more of a cushion, while low-income workers are languishing.
Emergency Savings—Now Spent
The report details how households making between roughly $30,000 and $45,000 annually typically have less than $1,300 in cash on hand, and spotlights how in July 2021, 34% of Americans reported having less money to spare as emergency savings than before the pandemic.
Jason Chepenik, senior vice president of the retirement and wealth division at OneDigital, tells Newsmax Finance: “We should be concerned as a country. Forty percent of Americans cannot produce $400 in emergency savings,” citing a sobering statistic from 2019 that highlights Americans’ saving troubles.
Citing another study that found more than 70% of Americans are stressed over their finances, Chepenik says investors in the plans he serves are expressing their financial worries. He describes the savings outlook for Americans right now as bleak.
“The extra stimulus from COVID came in, but Americans largely spent it and have very short memories,” Chepenik says. “Americans have not been focused on emergency savings, and, instead, have returned to traditional spending habits, all while accumulating debt in the process.”
Old-Fashioned Budgeting
Chepenik says that financial literacy, cutting back on spending, and better saving habits could bolster Americans’ retirement savings and even their bank accounts. “We are in an environment of, if we do not commit to better habits, we will have major problems. Student and medical debt is enormous,” Chepenik says, pointing out that student debt in America has reached a record high.
In conclusion, the news that excess savings are dwindling is an alarming and sobering headline. At the very beginning of the pandemic, many American households responded to furloughs or layoffs or general economic hardship by focusing on saving. That discipline has since flown out the window.
To make matters worse, it does not seem like a new stimulus is coming anytime soon, leaving millions of Americans struggling paycheck to paycheck.
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