New data from the Bureau of Economic Analysis (BEA) has revealed that Americans are slowing their savings, despite an increase in their income.
Personal income rose $155.3 billion (0.7%) in October, according to the bureau’s estimates, and personal disposable income (DPI) rose $132.9 billion (0.7%) . The downside: increased income has not translated into greater savings. Personal savings were $426.5 billion in October and the personal savings rate (personal savings as a percentage of personal disposable income) was 2.3%, the lowest since 2005.
Why are Americans saving less?
Experts attribute this lower savings rate to a few different factors.
Consumer consumption habits are changing.
At the height of the pandemic, the personal savings rate increased. According to the bureau, personal savings reached $4.12 trillion in May 2020 and the personal savings rate was 23.2%. “Those I speak with who have the financial capability seem to spend whatever savings they have on home renovations and travel,” says Brian Kuhn, CFP®, CLU®, CLTC® and financial advisor at Wealth Enhancement Group. “The work-from-home trend continues to drive interest in improving these spaces, and people are also making up for lost time by traveling.”
Inflation puts pressure on savers’ wallets. According to the most recent Consumer Price Index (CPI), the index that measures the average change in prices over time, over the past 12 months, the all-items index rose 7.7% before seasonal adjustment. “Inflation is the most visible reason why people may save less of their income,” says Kuhn. “The same things they used to buy cost more, like food and entertainment, and they use the same amount of income to buy them.”
See this interactive chart on Fortune.com
The case for prioritizing your savings account
Using your disposable income to splurge on some of your “wants” or to-do list items can be okay if you do it in moderation. But that shouldn’t come before saving for big milestones like getting out of debt, building an emergency fund, or retiring. It takes time to build up an adequate emergency fund that covers your basic living expenses, but having that safety net is crucial and can save you from financial ruin if you run into hardships like losing your job or unexpected medical bills.
Less than half of Americans have enough savings to cover a $1,000 emergency, according to a Bankrate survey. And about 35% of those surveyed said they would cover the cost of an emergency using a credit card or personal loan, or by borrowing money from family and friends. And while credit cards and loans can be invaluable tools for financing life’s most expensive purchases, resorting to debt as a solution to your financial woes can lead to unmanageable, high-interest balances. and make it more difficult to achieve your long-term goals.
How can I boost my savings?
There are several ways to work to increase your balance or replenish any funds you may have spent. Some ways to maximize your savings:
Choose the right savings vehicle. The best way to grow your savings with minimal effort is to shop around for the right account. Keeping your funds in a traditional savings account can earn you interest on your balance, but alternatives like a high-yield savings account, certificate of deposit (CD), or money market account offer significantly more APYs. high, on average, especially in stride. recent Fed rate hikes.
Adjust your budget and direct more towards your savings account. If it’s been a while since you last checked your budget, consider going through your regular expenses to see if there are any areas where you can reduce the number of expense categories or reduce costs by negotiating your bills. If your credit card bill is eating into your budget, call your credit card company and ask them to lower your APR. You can also review your phone plan and see if there’s a way to lower your bill by removing extra features you don’t use. Insurance premiums are also up for negotiation, shop around to see if you can get a lower rate or bundle your policies to save money and roll those funds over to your monthly savings contribution.
Increase your savings contributions whenever possible. Whether it’s an end-of-year bonus, your annual raise, or extra income from a side hustle, put some of that extra money towards your savings goals. Although it may be tempting to use these funds for short-term needs, you should adjust your savings contributions as your income increases and you have more money to work with. Plus, increasing these contributions could help reduce the time it takes you to reach your savings goals.
The take-out sale
If you’ve gone from saver to spender, now is the time to shift gears and get your savings account(s) back on track. By choosing the right savings vehicle for your needs, implementing a disciplined budgeting strategy, reducing your expenses and increasing your savings contributions over time, you can ensure that your future self will have a good cushion to cover emergency expenses and fund future goals.
This story was originally featured on Fortune.com
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