As a country, the United States resents saving money.
However, we bonded not long after the outbreak of COVID-19. In April 2020, Americans saved 34 cents for every dollar earned.
Lockdowns (government or self-imposed) and lack of in-person entertainment were major contributors. But it was an eye-opener for many people, says money expert Clark Howard.
“It was amazing. People were spending like a rock. And people were paying off their debts like crazy,” Clark says. “The banks were freaking out because people were paying off credit card balances that had never been done before.
“It was a big turning point in how people deal with money. The amounts of money people borrowed went down. The amount of money people were saving increased like I had never seen in my entire life.”
According to Federal Reserve Economic Data (FRED), as of July 2021, Americans were still saving more on every dollar than they had sustained since the early 1980s. But in the eight months since, we’ve saved just 6 cents for every dollar we make, from almost 11 cents.
The latest figure, 6.2% savings in March 2022, is the lowest since March 2013.
“Six cents on the dollar is better than zero cents on the dollar. But it’s not enough to create security in your life,” says Clark. “It is not enough to cope with financial emergencies. Or to save for the future, e.g. For example, for retirement — or to pay for a child’s education or a down payment on a house.”
Worse, those credit card companies and banks aren’t worried anymore. Household debt increased by $1 trillion in 2021, according to the Federal Reserve Bank of New York. That includes an increase of $333 billion in the fourth quarter of 2021. Both numbers are the highest since 2007 – just before the financial crisis.
Credit card balances too up $52 billion in Q4 21, the most in the 22-year history of the data. The shortage of supply for houses and cars and the looming risk of significantly higher interest rates were key factors.
Americans also use “Pay in 4” services, installment loans for simple things like gas and clothes, much more frequently.
Clark is concerned about the financial stress people are under, especially with inflation at a generational high and temporary market uncertainty. It’s a good time to rethink your approach to building an emergency fund and saving for retirement.
“You’re taking out the entire financial cushion of your life when you’re in debt and debt and debt, and you’re not saving any money,” Clark says. “The more debt you take on, the more money you have to spend on that debt.
“If I describe you, take a break. Try to get your spending, borrowing, and saving back in the right direction. We showed two years ago that we can definitely do that. And now it’s time for us to get back to that.”
Clark saved 50% of his income early in his career and even retired in 1987 when he was just 31 years old.
The Motley Fool’s Daniel Sparks put together a chart using numbers MrMoneyMustache.com. If you increase your savings rate from 10% to 20%, you can probably retire 14 years earlier.
Many experts say you need to consistently save 20% of your take-home salary.
But how much of your paycheck you should save depends on many factors. This includes your age, how much money you have in a savings account, any debt you owe (interest rates and amounts) and whether you are on the road to retirement.
Clark has a nice guide to the steps you should take to get your financial life in order. But his greatest directive was always simple: live on less money than you earn.