It all started with the pandemic.

Sitting in their homes, Americans received stimulus checks, collected unemployment, and saw a surplus of money flowing into their bank account. We aren't a country known for saving cash, but in August 2020, USA Today reported that “Americans are sitting on record cash savings”. The average savings rate was just 7.5%, but when everything was locked down, that figure spiked up to 33%!

But what goes up has to come down. In 2021, SPG Global predicted that trillions of dollars in excess savings would be unleashed when the pandemic was over.

In 2022, once the pandemic ended, a record $1 Trillion was spent online. The Wall Street Journal reported that Americans spent more in all categories: from groceries, recreational goods, and vehicles, to services to such as housing, dining, and insurance. Appetites for recreational activities expanded, with more money being spent on travel, the Barbie film, and Beyoncé’s Renaissance Tour. Someone paid almost $90,000 for a ticket to Taylor Swift’s Eras Tour – for a seat in row 25!

All this reckless spending has led to where we are – 80% of Americans have already run out of pandemic savings, and it’s about to get a lot worse over the next few months. Here's where that money is going, what it means for you, and how you can save more money to fall back on when you need it.

Expensive times

To begin with, everything now costs more than it did in 2020 – by a lot.

But wages don't seem to be growing in tandem – increasing 9% for the lowest 90th percentile of Americans, 1.8 to 4% for the middle class, and 4.9% for the top 10% of earners. But with expenses going up 30 to 50%, unless your income has gone up by at least the same amount compared to what you were earning four years ago, you're probably earning less than you think.

Part of this has to do with the hike in the Federal Funds rate which has gone from 1.5% to 5.25%, with most of that coming in the last 18 months. The value of money that consumers are holding has also dropped substantially – we saw a 40% increase in US Money supply in just the last 3 years. It's no surprise that consumer prices have gone up by nearly the same amount in exactly the same time frame.

Running out of savings?

Most people aren’t real-life versions of “Extreme Cheapskates”, but the concern is that spending has increased to a level where the pendulum has swung the other way. The average savings rate is down by a lot, with the average person stashing away just $3.9 for emergencies, for every $100 they make – which is nowhere near enough, considering that two-thirds of workers won’t be able to come up with even $500 for an emergency.

There are a lot of alarm bells ringing that Americans are running out of money. As to when that'll happen, it depends on whom you ask. Bank of America said in September that "median household savings and checking balances were up by more than 40% relative to 2019, for low, medium, and high-income households." Chase Bank agreed too, based on the median bank balance of their depositors.

However, the San Francisco Fed suggested that Americans have burned through 90% of their excess savings amassed during the pandemic and would have exhausted the rest by September (which has already passed).

Another survey said that Americans would run out of money in early 2024 – but it's really not that easy to predict accurately. Regardless of the timelines, one thing is true though. American finances seem to be getting steadily worse...

Why savings are burning up

A recent survey by USA Today analyzed the reasons for the gloom in the economy and broke it down into 5 main categories:

  1. Rising cost of living – 84% said that they felt their expenses continued growing larger by the month.
  2. Rising debt – Twice as many participants said their debt had increased than decreased.
  3. Pandemic Relief has ended – 55% of Americans received (and depended on) some form of stimulus throughout the pandemic.
  4. “Essential Spending” is becoming more common – 92% of adults have reduced their spending in the last 6 months.
  5. Low-income bracket – Those making under $50,000 per year already have the least available to spend and they’re often the ones accumulating the highest amount of credit card debt.

So now that you know exactly what’s happening, here’s what you can do to prepare and ensure that you can put yourself in the best possible situation, no matter what happens:

How to save

For clues on how to save money, the best source is The Consumer Expenditure Survey which studies where exactly the average American is spending their money. Here's the overview:

1. Housing

The average person spends 33% of their budget or $24,928 per year here. Since this is the largest expense, it pays to focus here the most. To save on housing costs, first look into:

  • Renting out any unused space, like a garage or basement for storage, or a spare bedroom to a roommate.
  • Alternatively, you could also renegotiate your lease.
  • Or you can move to a slightly cheaper area, or downsize to save the difference. Rents are currently falling across most cities, so take advantage of this.

2. Transportation

At $12,295 per year, this is the second largest expense. Higher fuel costs are pushing this up and to make matters worse, the average interest rate for a new car is now 6 to 9%.

Here’s my recommendation: Get the most affordable, reliable, good-on-gas used car you can, and then drive it until it doesn’t run. (A 2008-12 Toyota Camry can be bought for less than $12,000, for example). The average American buys a new car every 6 years – buying a used car that's already at the bottom of the depreciation curve can help you save money and absorb any anticipated loss in the car's value.

3. Food

Americans are spending $9,343 a year, or 12.8% of the average budget on food – more than half of which is because of eating out. Here's how you can save on that without punishing yourself:

If the reason you're buying a Starbucks instead of making coffee at home is because you're lazy or you just want to save ten minutes on packing a lunch from home, that's a big waste of money and you should stop. Instead, if you save up and have a nice meal with friends or family once a week, that's a worthwhile experience that will be far more satisfying.

By cutting down on quick treats and dining out on meaningful occasions, even if you save just an extra $100 per month, it really begins to add up.

4. Pensions and insurance

Personal Insurance and pensions are the last category, at $8700 per year.

Social Security and Pensions might be a fixed cost depending on where you work but personal insurance is something you can always shop around. You would be surprised how much you could save with an hour of work, calling around, and comparing personal insurance rates.

Just recently, I was able to switch around my car insurance and wound up saving $130 per month - while increasing my coverage. It took me just 20 minutes to get a different quote after doing a small amount of research. That research could save you $30-50 a month.

There are plenty of other “random expenses” that you could easily cut back. The report, for example, shows average spending as $583 spent on alcohol, $1945 on clothing, $371 spent on tobacco, and almost $3500 on entertainment. But you’ll get the highest ROI by focusing on the larger items, first and scaling back on everything else over time to be able to save the difference.

So, in terms of my own thoughts: Americans are running out of money but this really only applies to the excess savings that were accumulated throughout the pandemic. Most people will unconsciously spend whatever is extra and then, revert back to a more “bare-bones” budget once they absolutely have to.

Unfortunately, this just seems like human nature and, it’s likely that our economy will begin to slow down as a result. But being more conscious about what you're spending, and beginning to save and invest the difference before you need to can put you in better shape than most others. Especially when those savings are indispensable.

That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)

Stay safe, stay invested and I will see you next week – Graham Stephan.

113 Cherry St #92768, Seattle, WA 98104-2205
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A 32 year old real estate agent and investor with over $120M in residential real estate sales since 2008, I've created this profile to share my successes, failures, insights, and experiences in the investing world.

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