Although unemployment remains low and inflation is showing signs of easing, one economic data point is worrying to many economists: the personal saving rate.
In September, the personal saving rate, which is the amount of income Americans have left each month after they’ve paid their bills and taxes, was 3.4 percent—down from 4.0 percent in August, according to the Bureau of Economic Analysis. During April 2020, when the pandemic led to a nationwide lockdown, the personal saving rate soared to more than 30 percent. Since then, though, the saving rate has been falling fairly rapidly.
A decline in personal saving is worrisome for several reasons. It means consumers have less of a cushion to tide them over if they lose their job or suffer some other economic calamity, such as significant medical bills. At the same time, if consumers start increasing the balances in their emergency savings accounts, spending could decline—and strong consumer spending has bolstered the economy and helped avert a recession.
Fitch Ratings expects a sharp drop in spending in the fourth quarter of 2023 because of several factors, including a slowdown in wage growth, the resumption of student loan payments after a three-year pause, and the reduction in excess savings. Brian Rose, senior economist for UBS Global Wealth Management, said in a recent report that the current personal saving rate is “unsustainably low, and the main downside risk to growth is that the savings rate will suddenly move higher.”
Financial planners recommend having at least three to six months’ worth of living expenses in an emergency fund, although the amount will vary depending on your personal circumstances. Money in your emergency fund should be invested in an easily accessible, no-risk account, because this is money you can’t afford to lose in the stock market, and you may need it in a hurry.
Fortunately, thanks to the Federal Reserve Board’s series of interest rate hikes over the past couple of years, you can earn a decent return on a bank savings account or money market deposit account. Some high-yield savings and money market accounts are paying interest rates of 5 percent or more with no minimum balance required. If your savings are still moldering in a low-interest bank account, shifting your funds to one with a higher yield will help increase your savings and encourage you to save more.
Cutting back on spending will also help you shore up your emergency savings, although that’s admittedly hard to do during the holidays. Rising prices for some goods and services also make it more difficult to save.