While there are many aspects of 2020 which we might prefer be forgotten, there were a few positive outcomes from the year which need to be highlighted. As a majority of individuals in the U.S. were sheltering-in-place during Covid-19 an interesting thing happened. Because we were unable to travel, dine out and generally entertain ourselves by spending lots of money, the U.S. personal savings rate jumped to a record 15% of gross income. As can be seen from the chart below, not since the early 80’s has the U.S. seen a savings rate even in excess of 10% and it has been as low as 3%, which occurred just prior to the Great Recession.
Even though the jump in personal savings was not spread evenly throughout the population, it does represent a very positive change, one that shouldn’t be abandoned when the world returns to it’s new “normal”.
It is interesting to note that in order to successfully fund retirement, it is recommended that a consistent annual savings rate of 10-15% is required. With this chart going back to 1960, you can easily see that individuals consistently save less than they need for the future.
The Covid-19 restrictions forced people to change their lifestyles. For many, eating at home became the new normal and many found enjoyment in preparing meals as a family. Some took it a step further and began to jump on the sourdough bandwagon, making their own bread, or even adding a backyard garden, to grow their own vegetables. Even though a high level of carry-out meals still occurred, spending on food changed. At the same time, sharing socially distanced fire pits and putting puzzles together became the new entertainment. People didn’t travel, they didn’t drive much, they couldn’t attend events and assuming they were among the fortunate to still be working from home, they had excess cash to save.
For many people already in retirement, they were able to reduce the amount of their monthly withdrawals because of this change. They found they could live on less income. For those individuals who were still working, they were able to save more or apply higher payments to their existing loans, creating stronger balance sheets for the future.
Now that the country is beginning to open back up and vaccine numbers are steadily increasing, take a few minutes to look back on 2020 spending.
Did your list of “needs versus wants” change because of the imposed restrictions? Have you learned that some sources of spending just don’t matter anymore? Do you anticipate being able to retain some of the “simpler” means of enjoyment, making more permanent changes in entertainment expenses?
For most, 2020 was a step out of the routine giving everyone a chance to reflect on their collective spending habits, possibly causing them to tweak their spending going forward to better reflect what is truly important to them and their families.
As you consider these questions, remember that even though 2020 represented a forced change in people’s spending habits, it did result in significant increases in the personal savings rate. These higher savings levels might represent more appropriate amounts for a successful retirement. Maybe 2021 can be the year those good saving habits continue to help have a more secure future.