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 ^[1], being debt-free ^[2], and maxing out your IRA ^[3] 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-free”, 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 ^[4] 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.  

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 ^[6] 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 ^[7]” and MSN Money’s “Need an Odd Job? Give Blood or Watch Porn ^[8]”, which appeared as front page stories.

Even higher-end brands have picked up on this new consumer mood and are advertising heavily with coupons ^[9], 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 ^[10] 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?