US Savings Rate Plummets to 10-Year Low: Causes & What to Do

Americans' savings rates have dropped to 10-year lows. Here's why.

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Key points

• The savings rate of Americans soared to an all-time high of 33.8% in April 2020.
• $3.6 trillion has been handed out through pandemic relief programs
• Consumers have ramped up their spending, rising 6.1% in January from a year ago. This is the biggest rise since 1982.

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In April 2020, the savings rate of Americans soared to an all-time high of 33.8%. Savings soared due to the billions of dollars of aid the federal government handed out at the start of the pandemic.

On top of that, households spent less on traveling, in-person entertainment, and other activities. Since then, the savings rate has returned to pre-pandemic levels. In January, the savings rate dropped to 6.4%, the lowest since 2013.

Pandemic relief programs over

In response to COVID, Congress approved $4.5 trillion in aid. $3.6 trillion was handed out in the form of stimulus checks, small business loans, unemployment benefits, and other government programs.

Most of the pandemic relief programs have ended and millions of employees are still out of work. Due to inflationary fears, the government is looking to raise interest rates in the upcoming months. This makes it more expensive to borrow money, so consumers and businesses decrease their spending.

This could potentially slow down the economy, increasing unemployment. While higher interest rates may be bad for borrowers, they benefit savers. The fed funds rate determines the APYs savers earn on CDs, savings, checking, and money market accounts.

Increase in spending

The Bureau of Economic Analysis reports that despite high inflation, consumer spending increased by 2.1%, more than the 1.6% estimate. Personal spending rose 6.1% in January from a year ago, the biggest rise since 1982. This means consumers ramped up their shopping in January, even though income remained flat.

The decreasing savings rate may be a warning sign. Many households may not have a cushion to fall back on as inflation and supply chain issues continue to take a toll and oil prices have hit an all-time high due to the Russian invasion of Ukraine.

With consumers having to spend more and save less, it is important to maintain a budget and improve their personal financial situation with a financial plan. With interest rate increases on the horizon, it may also be an impetus for consumers to save more.