80% Of American Households Are In A Worse Financial Position Now Than They Were Before The COVID Pandemic Hit — What You Can Do To Keep Your Head Above Water

The latest Federal Reserve study revealed a concerning trend among American households, particularly those outside the wealthiest 20%, according to a Bloomberg report. Since the onset of the COVID-19 pandemic, they have depleted their extra savings and have less liquid assets than they had before the pandemic began. If this is you, consider speaking to a financial advisor.

As of June, the bottom 80% of households by income, when adjusted for inflation, had lower bank deposits and other liquid assets compared to their status in March 2020. The decline marks a significant shift from the initial phases of the pandemic, where various factors, including government financial support and restricted spending opportunities during lockdowns, led to an accumulation of excess savings.

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The Federal Reserve, along with Bloomberg calculations, identified a rapid drawdown of these excess savings, particularly stark among the lower-income groups. While all income groups have experienced a decrease in real-term cash balances from the peak in 2021, the disparity is noteworthy. The wealthiest one-fifth of households still have cash savings approximately 8% above their pre-COVID levels. In stark contrast, the poorest two-fifths have witnessed an 8% decrease, and the next 40% — broadly representing the middle class — have seen their cash savings fall below pre-pandemic levels.

This situation indicates a dwindling financial buffer for the majority of U.S. consumers. Their spending has been a driving force in keeping the economy active and averting a widely anticipated recession. But as these households’ financial reserves deplete, concerns about an impending economic downturn are resurfacing. The Federal Reserve Bank of San Francisco predicts that the aggregate stock of excess savings will likely be exhausted in the current quarter.

Despite these challenges for individual households, the overall household net worth in the U.S. surged by approximately $5.5 trillion in the April-June period, reaching a record high. This increase, primarily driven by housing market gains and stock market upticks, reflects a wealth accumulation that predominantly benefits wealthier households, who are more likely to own stocks and real estate.

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Compared to previous recessions, the large-scale government support and enforced savings during the pandemic initially boosted Americans’ financial standing. This increase in disposable income contributed to a rapid economic recovery. As these extra savings are exhausted, the long-term sustainability of a recovery is becoming uncertain, especially for those not in the top income bracket.

What can people do to navigate these challenging times if they aren’t part of the 20%?  The key to maintaining financial stability lies in a combination of prudent budget management, strategic debt reduction and wise investment choices.

• Creating and adhering to a budget is crucial. It’s not just about tracking expenses but understanding where your money goes and identifying areas where you can cut back. This exercise helps in reallocating resources to more critical areas, such as building an emergency fund. An emergency fund, even if modest, can be a lifesaver in times of unexpected financial needs.

• Tackling high-interest debt, particularly from credit cards, is essential. These debts can rapidly escalate, consuming a significant portion of your income. Paying them off should be a priority, and if needed, seeking financial advice for debt management can be beneficial.

• Investing in traditional stocks is a common choice, but exploring alternative investment options like startups can offer the potential for substantial long-term gains. Of course, such investments carry risks and require careful research or consultation with financial experts.

• Diversifying income sources, reducing non essential spending and staying informed about government assistance programs are also crucial steps in this journey toward financial stability.

• Finding ways to supplement income through part-time jobs or freelance work can provide extra financial cushioning. Staying informed about government assistance programs and tax benefits is another avenue to explore for potential financial relief.

• Educating oneself on financial management and investment strategies is invaluable. The more you understand about personal finance, the better equipped you are to make informed decisions that can positively impact your financial health.