Personal savings hit a record high in April as Americans looked to bolster their emergency funds in response to the coronavirus pandemic. According to the latest data from the Bureau of Economic Analysis (BEA), the personal savings rate soared to 33% in April, up from 12.7% in March, and almost double the previous high of 17.3% set in 1975.
Americans on the whole have been stowing money away in commercial banks, credit unions and the best online banks, with separate figures from the Federal Reserve Bank of St. Louis showing the amount held in savings deposit accounts — which includes high-yield savings and money-market accounts — increased from $9.98 trillion in the week ending March 2 to $11.27 trillion by the week ending May 18.
The savings have amassed despite many suffering a drop in personal incomes due to the COVID-19 outbreak. Unemployment has soared to record levels, and others have been temporarily laid off as the country locked down, but with uncertainty breeding caution, many have sensibly looked to put spare cash away in preparation for difficult times ahead.
Why has the savings rate increased?
Importantly, the fact that people have been spending much less has provided the opportunity to save more. According to the BEA, personal consumption expenditures slumped by $1.89 trillion - or 13.6% - in April, the steepest drop since 1959. At the same time, households will have been boosted by the arrival of coronavirus stimulus payments.
“The primary reason for the rise in the saving rate is the fact that consumers literally had very few places to spend during lockdowns,” said Diane Swonk, Chief Economist at Grant Thornton. “Efforts by the statistical agencies to account for government aid also exacerbated the rise in saving as it boosted the amount consumers took in, on paper.”
Noting another potential drag on spending, Swonk added that baby boomers - who account for about one third of all consumer spending - had already been “growing more skittish about spending and apt to save prior to the COVID-19 crisis”.
“They are either near or in retirement and much more protective of their saving than in the past,” she added. “They are also more likely to stay away from public spaces given their increased risks of contracting the disease and fatalities. Men over the age of 60 have been hit particularly hard by COVID-19.”
Are people putting more money away for a rainy day?
Whatever the reasons that people are saving more, it is certainly a good thing. In mid-April, three-quarters of lower-income Americans feared their emergency funds would last less than three months, suggesting that those who have been hit the hardest by the coronavirus fallout are also likely to be the least prepared for such a financial shock.
The rise in the savings rate suggests people are taking note, while more recent analysis from Bankrate points to savings behavior taking a turn for the better too. Understandably, some Americans are having to use their emergency funds to cover outgoings, but an encouraging number have managed to save more.
Some 19% of people said their rainy day funds were larger now than before the coronavirus outbreak, and 39% said their funds remained about the same. On the other side of the coin, 19% said they now had less savings, and 24% admitted to having no financial safety net before the crisis and still not having one now.
How much cash should you put aside in an emergency fund?
The general rule of thumb is that you should try to keep between three and six months of fixed expenses in cash as a rainy day fund. That said, your personal circumstances should ultimately dictate how much cash you look to put away, including the size of your household and how safe you think your job is.
As to where you are best keeping your funds, Kristin McKenna, Managing Director at Darrow Wealth Management, has some worthy advice.
“Consider keeping your emergency fund in a separate high-yield savings account,” she says. “Switching banks can be a pain, but it’s worth it! High-yield savings accounts are currently yielding well above 1.5%. Compare that to a traditional bank that could yield 0% interest and switching is worth your time. Who doesn’t like free money?”
Find out whether you could earn more money on your savings at one of the best online banks.