By now, you have most likely heard about the impending recession on our doorstep. No doubt, you have also seen headlines making the news about government debt ceilings, volatility in the markets, Federal Reserve decisions, and banking scares. What you may not have heard as much about is a potential “Personal Savings Bubble” or “Personal Debt Crisis.” Albeit they are not as powerful of headlines as the ones we have seen, these are still important. Let’s bring you up to speed.
As of January 2023, the personal savings rate of a person in the United States was 4.7%. The savings rate hit a recent low of 2.7% in June 2022. At that time, Americans were experiencing peak inflation. Looking back to the 1960s, the only other times in history that the savings rate was lower than 5% were in 2001 and the years leading up to 2008. Both were followed by recessions.
Another factor coming into play here is the amount of U.S. consumer credit. At the beginning of March this year, credit card debt topped nearly one trillion dollars at $958 billion. This is the highest it has ever been in U.S. history. However, the rate at which it is growing is the fastest it’s ever grown since 2000 (over a one-year or even two-year period).
Total household debt and all forms of debt are rising as well. Americans opened a record number of credit cards last year too. Most claimed that they needed to keep up with inflationary prices going up.
Consumers were flush with cash and savings after the COVID-19 pandemic stimulus checks from the government. We have become comfortable with spending and going into debt faster than ever before.
All this is not to say that our personal savings and credit behaviors are going to cause a recession. They only make us more vulnerable. We, the consumers, make up about 70% of U.S. economic activity.
This is meant to be more of a reminder to control the things that we can control. Business cycles, economic downturns, and recessions are out of our control and will inevitably happen. What is more important during those hard times is how prepared we are as individuals or families.
Instead of decreasing our savings rate, we should be increasing it. This may mean cutting back on spending where we are able and shoring up our emergency and other savings. Don’t open or use credit cards unless you stick to a budget and can pay them off monthly. Have a goal not to go into debt, especially not credit card debt. If you already have debt, pay it off as soon as possible. Borrow “good debt” responsibly, and make sure you are able to manage it.
In addition to these tips, use any tax return you may get to pay off debt, buffer your savings or add to your emergency fund.
With all the economic uncertainty now and on the horizon, let’s not make this a personal savings crisis. Do all you can to create a financially resilient future for yourself and your family. Please reach out to the wealth management team with any questions.
Listen to a deep dive into this personal savings bubble on the Power Up Wealth podcast.
One Comment