The pandemic-era cushion of savings that many households built up is rapidly diminishing. According to an estimate fromman Sachs, Americans have already spent down about 35% of their extra savings accumulated during the pandemic as of mid-January. By the end of the year, the company predicts that roughly 65% of that money will be exhausted.
In 2020 and early 2021, government pandemic stimulus and reduced spending on non-essential items such as dining out and travel, led to an accumulation of extra savings by households. According to Moody’s Analytics, households amassed $2.7 trillion in extra savings by the end of 2021.
However, the factors that had initially increased savings started to reverse as the pandemic relief ended and inflation rates rose. This has resulted in some households having to cut back on spending or rely on credit cards, and economists predict that many have had to dip into their savings to stay afloat.
David Mericle, the Chief U.S. Economist at Goldman Sachs, explains that “At the exact same moment you lost the government transfer payments, you got hit with very high inflation, which made your real spending power lower.”
Freelance photographer Germán Vazquez from Philadelphia, for example, saw his savings grow from $4,000 in early 2020 to $20,000 in early 2022 due to reduced spending and government financial support. However, over the past year, his balance dwindled to $2,000 as government financial support was withdrawn, inflation rose, and his business slowed. Despite this, Vazquez’s savings have remained stable in 2023 as his business picked up and he continues to benefit from the government’s pause on federal student-loan payments. He states, “I’m trying to go in with a little more confidence, [but] if things don’t go according to plan, by April the savings are going to be gone.”
At the start of the pandemic, Americans were saving money at a historic rate, with a collective saving rate of 16.8% of their disposable income in 2020, compared to 8.8% in 2019. However, by 2022, this saving rate had fallen to 3.3%.
Many households are grappling with financial difficulties after they depleted their savings last year. However, David Mericle, the chief U.S. economist at Goldman Sachs, stated that the factors that led to this situation, such as soaring inflation and the end of government transfer payments, are unlikely to recur. Mericle believes that households should not have to resort to dipping into their wealth as much in 2023 as they did in 2022 to prevent a sharp decrease in their real consumption level. The monthly saving rate is estimated to increase modestly by Goldman Sachs, reaching approximately 4.5% by the end of the year.
Lower-income households have been the first to use up their pandemic savings, according to Matthew Rognlie, an economics professor at Northwestern University. Deposits are reportedly shrinking faster for poorer households than for wealthier ones. Bank of America Institute, a think tank within Bank of America, found that among customers with a household income below $50,000 per year, the median balance in checking and savings accounts peaked in April 2021, but dropped 36% between April 2021 and November 2022. On the other hand, for customers with a household income between $100,000 and $150,000, the median balance fell by 14%. Nevertheless, median balances for all income brackets remained higher compared to prior to the pandemic in February 2020.
As their savings dwindled, many households had to become more stringent in their spending. Katrina Bailey, a 44-year-old project manager at a community college based in Hampton, Virginia, said her pandemic savings were depleted by last fall. Bailey started 2020 with approximately $1,000 in savings, but that amount grew to $6,000 over the following year. Currently, her two savings accounts hold $50 and $100, respectively. To cut back on spending, Bailey and her household reduced dining out and their wine-and-cheese date nights at home, as the materials are expensive. The family had planned a trip to New York this summer, but due to high airfare costs, they opted to drive nine hours instead. Bailey expressed disappointment in not being able to maintain her savings, despite her initial expectations.
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