Effects of the Recession on American’s Personal Finances: How Long Will They Last?
Financial gurus have been touting the benefits of saving your money, being debt-free, and maxing out your IRA for years.
And their influence and determination has paid off for a segment of Americans: how many of us now can shout out “we’re debt-freeâ€, confidently reach our early retirement or on-time retirement goals, and pay cash for all of our expenses? However, the majority of America has still remained enslaved to debt, living paycheck to paycheck from incomes of $200,000+ all the way down to the poverty line, and saving only a pittance towards retirement.
That is, until the recession hit in 2008. Suddenly when the economy tanked, many of the Americans on the other side of the ledger began to act like those of us who have listened to the advice of the financial gurus all along. And quite honestly, I could not be more excited! But will this trend last? Let’s take a look.
Debt Repayment Has Become More of a Priority
As the country’s debt continues to soar at levels of over $13 trillion along with the unusually high unemployment rate, Americans have taken it upon themselves to pay down their own debts with more urgency than before. The amount of non-mortgage debt is now at $2.44 trillion, whereas in March of 2009 it was $2.54 trillion. According to Money Magazine, this is due largely to the fact that consumers are paying down credit card debt, and have paid off approximately $82 billion of it over the last year. Â
Personal Savings Rate is Up
Another thing Americans are doing instead of spending is saving money. According to the Bureau of Economic Analysis, the personal savings rate in January of 2008 was just 1.3%, but in January of 2009 it was a promising 4.4%. While the current personal savings rate in May 2010 is down a bit at 4.0%, it is still much better than the pre-recession 1.3%.
Frugal is Fashionable
There are promising signs all around us that people are being more frugal with their money. In general, people are more often opting to spend cash rather than to charge on their credit cards.
Even layaways have become more popular again as people look for a way to buy what they want without putting it on plastic. Major news sources have daily frugal and saving money articles such as Good Morning America’s “Mom Feeds Family of Six on $4 a Week†and MSN Money’s “Need an Odd Job? Give Blood or Watch Pornâ€, which appeared as front page stories.
Even higher-end brands have picked up on this new consumer mood and are advertising heavily with coupons, sales and clearances. Off the top of my head I can think of a few surprises I found in the Sunday coupon inserts or on television commercials over the last two years: $20 rebates for Bissell vacuum cleaners and Phillips Norelco Electric Razors, coupons for Vita Herring or Salmon, Godiva Chocolate, Oikos Greek Yogurt, Tom’s of Maine body products, Burt’s Bees body products…the list could go on. In fact, Oprah Winfrey has just come out with “The Big Deals Issue†for its new August O Magazine that is all about saving money.
Will This Last?
I think many of us who are frugal and financially savvy have been asking ourselves if this is all going to continue, or if after the economy comes back to life, so will America’s spending habits.
After analyzing the history of the personal savings rate from the Bureau of Economic Analysis, Dave Manual states the following:
In the early 70s, the average savings rate started to spike, hitting a peak of 14.6% in May of 1975. The spike in personal savings rates from 1973 to 1975 coincided with the deep recession that was ravaging the country over the same period of time. As you will see, recessions (usually) result in increased personal savings rates as people tend to dramatically scale back on their purchases in times of economic distress.
He goes on to discuss the personal savings rate during other recessions, and how after the recession is over, it generally plummets. Other financial analysts predict that the personal savings rate will remain in the measly range of a few percentage points, or even decrease back to pre-recession percentages due to low interest rates and because some people are having to use their savings to live on right now.
I would love to think that people are going to continue the trend of saving more of their money, spending less, and socking away extra towards their retirement—all things that excite me—but I am skeptical. I am sure there will be some who were so impacted by the recession that they will forever change their ways, such as those who had their homes foreclosed on or who declared bankruptcy. However, I predict that most will likely go back to their old habits once the economy comes around.
What are your thoughts?
I don’t think people will continue to be as frugal as they are now. Once they have a steady job and are earning money again, they’ll be ready to spend it all.
For the most part, your situation won’t change who you are financially. You have to make the choice to live a financially responsible life consciously. Most people now are only living frugally to get by, until things get back to where they were before.
It’s the cycle that always repeats. 🙂
I have to agree with BMB…people will change when they have to but it doesn’t stick unless they changed because they wanted to.
I just hope savings rates go up soon…being happy about 2.15% is depressing me…
The fact that we topped out at 4.4% savings does not give me hope that Americans have learned new lessons of frugality. For a $50,000 annual income, that means a mere $2200 of savings. Not even half of what one should be putting in a Roth IRA every year.
It sounds as though we tightened the belt for a brief time, perhaps foregoing a European vacation for a domestic one. Or delaying that purchase of that must-have SUV for an extra year.
I’m disappointed to say it, but I think most people are merely waiting for the means to get back on that credit horse.
Hey guys!
I think I will have to agree with each of you, though I hate to be pessimistic:). I think the Great Depression really left changes in people because it was SO much worse and life-changing than this recession; not that I would want to wish the circumstances of the Great Depression on anyone.
Amanda,
I could not agree with you more that the Great Deppression left a change in those folks. This Recession has not done that to folks yet but we are no where near done folks! How many of you can say that you do not know someone who is out of work or on unemployment benefits, how many can say that they do not know someone who has struggled with housing issues? Credit card debt is only part of the picture. If the average family earns somewhere around $60K take out taxes and tithing now let’s just say that puts them around $48K so their housing should be around $16K per year. Everything else should be managed on Another 16K per year leaving them $16K per year to sock away for emergency, family vactions, retirement, children’s college. Can you find housing for your family for $16K per year (that’s everything mortgage PITI , maintenance, electric water,furnishings. Oh so you rent still gotta cover , utilities, small maintenance and furnishings. Can you do it?
What about 16K for everything else food, clothes, health care, school supplies, transportation, cable bill, eating out, HOA fees, Driver’s license renewal, tags for the cars, toll road fees, on and on everything pets, vets, co pays for doctors everything can you do it for 16K? You can’t well it comes out of emergency, vacation, retirement forget about kids college funds,or get more income coming in!
Why was non-mortgage debt cited, but not mortgage debt? Debt is debt. I believe the refusal of people to include mortgages in the debt payment discussion does a great disservice to a number of people who could be eliminating this huge debt from their lives much earlier without much extra effort.
Hello Executioner!
Thank you for your opinion. My father and I were just having a deep financial conversation a few weekends ago, and he was wondering the same thing: why is mortgage debt not seen as debt in the U.S.? In fact, he said that people with a mortgage were almost seen as more legitimate.
Great question.
no way it will continue, it’ll only happen if there is “real pain on a generational level” think great depression, bread lines, stealing coal etc
I think for those that have been affected most will keep the lessons they learned. If someone lost their home, if someone was unemployed for a long time, I think they’ll learn the lessons and carry them forward. For those that were ‘business as usual’, it might be tougher.
I agree 100% that mortgage debt should be included in the discussions, both on a micro (in the house) and macro (in the economy) level. I think the reason it’s not cited is that, up until recently, the mortgage was offset by a tangible asset, so it wasn’t really seen as the same kind of debt as a credit card debt, an auto debt, or student loan debt, where chances are there aren’t tangible assets that could be recovered to pay off the outstanding debt. Obviously, mortgages now fall into the same category in so many cases, but I guess it would be a huge shift in mindset and policy to start thinking of them the same way.
Call me a cynic, but I think the only reason savings rates are up is because credit availability is down.
I was just listening to NPR yesterday and one of the politicians was talking about ways to make the banks start lending again.
Normally I side with the consumer, but we blamed the banks for lending too much money and now politicians are blaming them for not lending enough.