More Saving May Be A Double-Edged Sword

More Saving May Be A Double-Edged Sword

almost 4 years ago2 mins

Low savings left many financially unprepared for the present crisis. Now, however, there are concerns that increased future thrift could hinder the broader economic bounceback… 😟

What does this mean?

With most Americans lacking sufficient savings to cover three months of expenses, the loss of millions of jobs has left many dependent on government support. Even then, inability to meet financial commitments like rent is amplifying the economic damage of the coronavirus.

Income stagnation left the average inflation-adjusted US household income in 2018 only 3% higher than in 2000. And rising income inequality prior to the last recession saw richer families’ savings helping keep interest rates low while poorer Americans loaded up on debt – with the subsequent repayment burden reducing their ability to save 🏋️‍♂️

Middle-income households’ financial assets grew just 4% over the past decade (Source: WSJ)
Middle-income households’ financial assets grew just 4% over the past decade (Source: WSJ)

The imminent coronavirus-induced recession may help change things: Cornerstone Macro expects the overall US savings rate to increase to 11%. But that would see $500 billion taken out of the economy – potentially slowing recovery by months or years.

Source: Cornerstone Macro
Source: Cornerstone Macro

Why should I care?

Wider economic growth affects business success and, by extension, your income from paychecks and any investment returns. But the pandemic highlights the crucial importance for personal financial resilience of building an adequate emergency fund through automatic savings transfers. For two adults earning $100,000-150,000, this should take five months: check out Finimize’s thoughts on the matter here 😉

Emergency finds may soon become even more vital. With coronavirus predicted to be the most expensive event in history for the insurance industry, premiums could be headed north.

But the impact of tightened consumer belts is already becoming clearer on the other side of the Atlantic. Official data on Friday showed UK retail sales falling a record 5% between February and March even as food purchases rose, with one Bank of England expert warning coronavirus could be the biggest economic challenge in centuries. Still, savings are unlikely to get as much of a boost as they did in the last great global battle…

Source: Deutsche Bank
Source: Deutsche Bank
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