Will The COVID-19 Economic Shutdown Teach Americans To Save More Money?

One of the reasons many Americans are struggling so badly during the coronavirus (COVID-19) economic shutdown is because they do not have emergency savings. In fact, about 40% of Americans don’t even have enough savings to cover a $400 emergency.

Unfortunately, DataTrek Research co-founder Nicholas Colas said Tuesday the COVID-19 outbreak will likely scare Americans into saving at one of the worst possible times for the economy.

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Savings Correlated To Interest Rates

Colas looked back at trends in U.S. personal savings rates all the way back to 1959 and found savings rates correlated primarily to interest rates. The higher interest rates rise, the more financial incentive there is to save. However, there have historically also been spikes in savings rates following U.S. recessions, when the memory of financial hardship is strongest and/or when America’s immediate economic outlook is most uncertain.

“The typical American consumer response to recession is, indeed, to save more over the following months because they don’t know how long the downturn will last and if they will be directly affected,” Colas said.

During the financial crisis, the U.S. savings rate peaked in May 2009. But when Americans were saving the most would have been one of the best times to be buying stocks. From March 2009 to July 2009, the SPDR S&P 500 ETF Trust SPY gained 24.8%.

Temporary Savings Boost

Unfortunately, this uptick in post-recession savings rates is a drag on economic recovery, prolonging the macroeconomic hardship. This phenomenon is one of the arguments against stimulating the economy by sending direct payments to Americans. Many Americans who are not in dire financial need are simply going to set that money aside for now rather than spend it.

Colas found the savings rate tends to remain elevated for six to 12 months following a recession before drifting back down to its normal range.

He said the current situation is somewhat unique in that the economic shock was sudden and presumably only short-term.

See Also: 8 Best Investment Strategies During A Recession

Benzinga’s Take

Vanguard recommends Americans set aside between three and six months of living expenses in an emergency savings fund, but anything is better than nothing.

It may seem like an impossible task to save thousands of dollars all at once, but setting aside just $25 per week in an emergency savings account can build up $2,600 in only two years.

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