Power Up Wealth podcast – Personal Savings Bubble – Episode 45 transcript:
Sharla Jessop 0:00
What is happening to the savings habits in the US? I’m Sharla Jessop, President of Smedley Financial. Today, my guest and colleague, Parker Thompson, will talk about the concerning trend in household savings.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
Parker, thank you for joining us.
Parker Thompson 0:47
Thanks for having me.
Sharla Jessop 0:48
Parker works with the wealth management team and focuses on building financial plans with our clients to help them focus on their future success. Parker, in your research, what did you find alarming about the current trend in household savings.
Parker Thompson 1:02
I like everyone, had seen a lot of headlines, right, around recession and the big headlines that get you know, they catch all the eyeballs, it’s, you know, the Fed is doing this, the Feds doing that. And inflation is at this much. And we’re in a recession, or we’re going into a recession. One that I had seen pop up a few months ago was a personal savings bubble or personal debt crisis. And I was like, oh, I haven’t seen that. That’s interesting. And the more and more I looked at the more and more was harder to find people talking about this. And so it intrigued me how a lot of people aren’t talking about this topic, but the idea of a personal savings bubble, or a personal debt crisis in regards to a recession. And then as I dug into the data, I saw that what they were talking about was alarming to me at least right and hopefully to other people as we as we pick up on it. But I saw that the savings rate typically of all US consumers had dropped significantly last year in the middle of the summer, and still has not really gained steam, it hasn’t come back up as much as it should. It was down to 4.7 when it hit the low of last summer in June 2022 of 2.7. And what alarmed me was the only other two times in history, looking back to 1960. The only other two times that had gone that low was in 2001, and 2008. And those were right before recessions, right? So people were extending themselves and having to dip into savings to afford either high inflation or lifestyle at that point. And the other bit of data that I saw that was concerning was just credit was rising. US consumer credit, as reported by the Fed was climbing and to almost a trillion dollars. 958 billion to be exact. And that’s the highest it’s ever been in US history. So those two things and a couple of other stats that were alarming me said, Hey, we need to kind of pay attention to this a little bit more right to make this forefront and maybe have more headlines, or more articles written about what can we do to control ourselves through this recession, rather than let the recession guide us.
Sharla Jessop 3:01
I think it’s important to make people aware of their own habits that sometimes we don’t even realize, you know, they creep up but we don’t realize we’re doing it. So why is it a personal savings crisis?
Parker Thompson 3:11
I think that a lot of people don’t understand that their own saving can really affect how they can traverse through a hard or volatile market, right, or through a recession. Obviously, if you have things that go wrong, or if you get laid off in a recession, or you’re not getting paid as much as you used to. A lot of the times you’re gonna have to dip into savings, or you’re going to have to lean on some other options. And hopefully that’s not credit cards or or debt. And hopefully you have savings to get you through. But if you don’t have that, and we don’t have the personal savings, we don’t have things to lean on, that are safety measures in those hard times, then all of a sudden, we go into a recession because of a personal savings bubble that pops or a debt crisis. Because all of a sudden, you can’t spend because you don’t have the money. And once the consumers that make up 70% of the economy, us the consumers. Once we stop spending, it kills the economy.
Sharla Jessop 4:07
So really, we’re noticing two things, we’re noticing that the savings is going down. And that number by the way that you were reciting includes savings to retirement accounts. So that’s not just in a savings account at the bank, you know, don’t think personal savings is just a savings account make that also includes retirement, that to me is really alarming. And then also on top of that going down you’re seeing debt is going up. So explain to us what’s happening there.
Parker Thompson 4:32
In general, the simple way to look at it is is credit cards, right? Because when I when I think of consumer debt, I just think of credit cards. There’s obviously different forms and different means and ways. But the US just last year, the US consumers opened the most amount of credit cards ever. Right? So that’s also like a historical number. That was alarming too. That means that more people are leaning on these credit cards to get them through their monthly bills and groceries. Things that inflation has really made hard to purchase or the prices have gone up. It’s sad to think that people are leaning on credit to get them through. But that’s it’s worrying me a little bit.
Sharla Jessop 5:09
Certainly, because what happens to someone if they do lose a job, and they don’t have savings to fall back on and they use credit? How do they make the payments?
Parker Thompson 5:17
Yeah, if you don’t have savings or actual cash to make the payments, and you just get into this, this rabbit hole, right, you get into this ditch that you dig yourself and of all the forms of debt. Credit card debt might be the worst. You’re talking about right now, anywhere between 21 to 28% interest.
Sharla Jessop 5:33
That’s outrageous.
Parker Thompson 5:34
It’s unheard of, right? So I don’t recommend this. But you’d almost be better off getting a personal loan for 7%, even though that’s astronomically high to to pay for your means rather than putting on a credit card and racking up 20% interest. And that rolls over on itself. And if you’re just making the minimum payments, it can take you years to pay that off.
Sharla Jessop 5:54
Suddenly, you’re buying groceries on your credit card and only paying the minimum payment on your groceries, which are already outrageous because of inflation are now unbelievable.
Parker Thompson 6:06
Yeah, it’s it’s a bad recipe for you know, hard times. When we are already going into hard times and inflation is still hanging on, it’s being really stubborn, things are still expensive. And so the more expensive things are, the more that you’re paying for them. And the more that that money just stacks up and you gain interest on it. And you’re left paying interest rather than for actual lifestyle.
Sharla Jessop 6:22
Yeah, you know, it’s unfortunate, I’m sure there are so many people, even our listeners here who are in a situation like this or know someone whose situation like this. And it’s really hard to see a way out of that situation. What do you recommend for people? Or how do you help them understand a way out?
Parker Thompson 6:39
I think it’s something that maybe we’ve heard a lot, right. But it still holds true that those who are not living below their means need to and need to find a way to get that path right to open up path to get back to that point, the number one way that I found the of how to do that is through a budget, right as on as glamorous as that sounds is to just budget right? To really get down what are you spending your money on? And where? Where is it going awry? Right. And in some cases, it’s do we need to put these credit cards away? Do we need to throw them out? Do we need to cut them up? Can we start to use cash only? Or can we start to use a debit card where it’s taking the money that you’re getting in instead of putting it off to a later day? Sometimes it’s you have to kind of put yourself into controled measures, right and feel like you’re you’re restricting yourself, but you teach yourself principles that way that helps you get out of debt. So I always tell people budget. Live within their means or below your means. And another way is just to look at debt differently. I think that most debt is not good debt, but especially not consumer debt. So let’s try to differentiate between and this is a hot debate and a hot topic. But what is good debt and what’s bad debt. Bad debt is most likely consumer debt, right? You’re putting shoes or a new car or something on credit cards, right? And that would be not so good, right? It’s things that are that are more consumer base. But the debt that is sometimes better is on either an asset like your house or something that grows in value, like a business or I know there’s a lot of people that utilize that in good ways. We just have to keep in mind that, you know, we’re not trying to put the next vacation, right? Something that we don’t necessarily need on a credit card and go into debt just because of that.
Sharla Jessop 8:21
You know, it’s so true. And there’s so many ways, it’s hard. Nobody likes the word budget. It’s almost like a four letter word, even though it’s not because people feel restricted, and they look at it differently. But if you call it a spending plan, somehow that softens the blow a little bit. And there are so many tools available right now that you could keep on your phone. And even if you’re married or have a partner and you’re worried about your spending together, you can track what you’re doing. Talk to us about some of those tools.
Parker Thompson 8:47
It’s arguably easier today than it ever has been to budget, right, you’re not having to write down every transaction or type it all into a spreadsheet, which and that’s even using technology, there are apps that do it for you. They track everything for you. You know, you get to see all of your accounts on one snapshot. So it’s arguably easier today to do it more than ever. And one thing that I say is budgeting is not fun, a lot of the time, but let’s have a purpose behind it. All right, what are you trying to get to? Is it trying? Are you trying to protect from fallout right, from a recession or protect from the worst? Or do you need an emergency fund built up? Or it could be as fun as are we saving up for vacation? Sometimes the motivation behind the budget makes it a little bit easier to just get through.
Sharla Jessop 9:30
It can’t all be negative. There has to be some rainbows in there, right? Something to look forward to.
Parker Thompson 9:34
That’s and you talked about the allowance to spend, right? It’s a spending plan. If you have it tracked on your budget and you’ve given yourself the permission to spend on the budget, then it goes down a lot easier, right that that meal out with your significant other seems a lot better and when it’s not nagging at all, this is going to be debt. No, this is built on budget, so give yourself permission to spend.
Sharla Jessop 9:54
I’ve heard of people who even you know as they’re creating the spending plans, they’ll hang a picture on the fridge of or, you know, put their budget on the fridge and then their debt and show it going down month by month where they’re at so that they can feel a reward of something that isn’t really rewarding. Paying off debt doesn’t feel rewarding because you don’t see it. So make it visual. So you can see what’s going on.
Parker Thompson 10:17
Receptive tools to essentially reward yourself. Yeah, I like that a lot.
Sharla Jessop 10:21
It’s like when you’re trying to lose weight, first thing they tell you is write down everything you’re eating, because there’s a lot of things you’re eating that you’re not really aware that you’re eating, probably. And when you see what’s going on, it’s much easier to feel rewarded. But you know, hey, I did that. I know people who’ve used just an envelope budget. Talk to us about an envelope budget.
Parker Thompson 10:40
It’s the simplest form of doing it. It’s just essentially, you take out the cash that you need for that month, right? The amount that you want to spend, and you split up your budget based on envelopes, right. So this much for gas, this much for groceries, this much for whatever else it is on your budget, and you spend until your cash has gone out of that envelope. Once it’s gone, it’s gone. And you don’t have an allowance to take anything from anywhere else. And that really, that really forces you to think, okay, what am I spending in this certain area? And you don’t have to be confined to that amount of cash that’s in that envelope. So that’s a very, that’s a very definite way to do it. For sure.
Sharla Jessop 11:14
I would think that if you see $20 left in your envelope, you’re really going to think hard about how you’re going to spend it. Yeah, you’re just really, really want that, that sweet soda that I’m gonna stop by the Fiiz shop or whatever and get, or am I you know, better off just have some water?
Parker Thompson 11:27
Yeah, yeah, what’s really worth it? Right? What’s gonna fulfill my need or what’s going to give me the most joy for spending that dollar? Right? How do you stretch it as far as you can. And that can be the immediate reaction you get to whatever you purchase, or that could be the long-term goal, right? That could be the vacation or something that we’re saving up for. In this case and what I wrote the article was, let’s have a motivation of not making this a bubble or a crisis for us, right? If we do go into a recession, which seems kind of inevitable at this point, or at least the Fed wants it to be. If we do get to that point, you’re gonna feel a lot better if you’re in a better spot savings wise, right? If you’re very buffered, and if you’re not trying to pay off debt that is just climbing at an astronomical rate. And so maybe the motivation is just do I want to feel better and more prepared going into a time where there should there could be some job losses or there’s some income could go down or income fluctuates.
Sharla Jessop 12:19
Parker, that is good information and great tips for all of us, regardless of our situation. I appreciate your time.
Parker Thompson 12:25
Yeah, thanks.
Shane Thomas 12:31
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
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