7 out of 10 Americans spend their savings because of inflation – Forbes Advisor

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Americans have racked up about $2.5 trillion in additional savings during the pandemic. But now that money is dwindling as people use their cash reserves to keep up with inflation. According to a new Forbes Advisor survey, nearly 7 in 10 Americans are looting their savings as the prices of goods and services rise.

The government’s latest inflation reading shows consumer prices in April rose 8.3% from a year earlier, an increase close to a 40-year high. Inflation hurts workers, with wages unable to keep pace. From April 2021 to April 2022, inflation-adjusted real wages fell by 2.6%, widening the gap between income and the cost of goods and services.

Add to that growing consumer debt — $266 billion more from the fourth quarter of 2021 to the first quarter of 2022 alone — and it’s probably no surprise that savings are falling.

Older or younger: who spends more of their savings?

The survey finds that 68% of Americans say they have saved up to deal with higher prices:

  • 8% have completely emptied their savings
  • 23% used up a significant portion of the money they had saved
  • 37% have spent a small amount of their savings

People of all ages report having dipped into their savings because of inflation, but older respondents are more likely to have left their funds untouched even in the face of higher prices. Two-thirds (67%) of people aged 77 or over say they have not touched their savings, the highest rate of any group.

Savings expenditure due to inflation, by age group

While it’s unclear why older age groups are less likely to dip into their savings, rising rents could form a dividing line between generations in this time of inflation.

In April, the national median monthly rent jumped 15%, according to a Redfin report. And in some places, including Austin (46%) and Portland, Oregon (33%), the peak was much higher.

Older households have the highest homeownership rate, so their housing costs are likely fixed. Young Americans are more likely to rent. In the first quarter of this year, about 79% of people aged 65 and over owned their homes, compared to just 39% of those under 35.

Health care costs could be another expense that separates the age groups. Although older Americans generally need more health care, younger households tend to be more burdened with medical debt.

According to census data, 15% of households headed by people aged 65 to 69 have medical debt, compared to 23% of households headed by people aged 45 to 54.

As inflation continues, financial strategy is key

The Federal Reserve fights inflation with interest rate hikes and other monetary policy changes. But there is no way of knowing when inflation will start to decline or, at worst, whether the Fed’s actions will trigger a recession.

Consumers can adjust to inflation in a variety of ways, from cutting spending to consolidating debt. Some might also consider changing jobs for higher pay or better health insurance or a retirement savings plan.

Inflation makes it difficult for many people to save money, but saving money is essential for a solid financial plan.

“You should have three to six months of expenses in an emergency fund. If your job is more variable (commission, small business, gig work, etc.), you probably need close to six months of savings,” says Jay Zigmont, Certified Financial Planner and Founder of the Consulting Group Financial Live, Learn. , To plan. “That being said, if you’re in debt, you need to find a balance between paying off your debt and building up your savings.”

It means having a financial plan for an emergency and a way to maximize the return on the money you put aside.

When to dip into your savings

While it’s not the best idea to use savings to cover today’s higher prices for gas, food, and just about everything else, it beats an alternative: turning to your cards credit. Interest rates are often high, and they are rising.

In the survey, 64% say they expect interest rates to rise over the next 12 months. Fed rate hikes have an almost direct impact on many credit card rates, and as those rates go up, you’ll end up with a lot more debt from purchases you fund with plastic. If you must use a credit card, look for the best cards with 0% interest rates.

If you’re currently living off your emergency savings, make a plan to earn more money, reduce your expenses, or a combination of both, before your savings are completely depleted.

Many federal, state, and local programs can help people offset the higher cost of living through rebates and various types of assistance. Be sure to explore all of your options.

If you’re struggling to pay your housing costs, contact your landlord or mortgage lender to find a workable solution.

In some cases, you may be able to suspend rent for a period of time or skip a mortgage payment. Keep in mind that you may have to repay the amount you owe later.

How to maximize the return on your savings

Americans who still manage to save put the money in traditional places.

Maybe too traditional.

The survey revealed that more than half of savers (53%) accumulate money in a conventional savings or checking account. These are some of the worst ways to hide money if you want it to grow.

The main benefits of keeping money in a standard savings account are quick access to funds and low risk, but that’s where the benefits end. The best APYs on high yield savings accounts are just over 1%, which isn’t much.

When thinking about your savings, separate your money into short- to medium-term goals and long-term goals. For purchases you might make in the next few years, like a house or a big vacation, consider putting money into certificates of deposit (CDs) with the best rates. These savings instruments offer higher returns than savings or money market accounts.

Saving for the long term, namely for retirement, is a different beast, says Robert Johnson, Ph.D., CFA, CAIA, professor of finance at Creighton University in Omaha, Nebraska.

“You really can’t be successful in saving for retirement, for example, because the returns on savings vehicles are so low,” Johnson says. “But, if you have a long-term horizon, you can invest for retirement and be quite confident that the returns over long periods will exceed those obtained in low-risk savings vehicles. “

Be sure to talk to your financial advisor about your long-term goals, which are different for everyone. How you invest your money and how much you save depends on your age, lifestyle, expenses and retirement timeline.

Young investors typically put their retirement savings into higher risk investments that will pay out more because if there is a loss, they have time to make it up. As people approaching retirement age, it is generally advisable to transfer the funds to low-risk, low-return investments.

Find the best CD prices of 2022

Survey methodology

This online survey of 2,000 US adults was commissioned by Forbes Advisor and conducted May 25-27, 2022 by market research firm OnePoll, in accordance with the Market Research Society’s Code of Conduct.

This survey was overseen by the OnePoll Research Team, Member of the MRS and Corporate Member of the American Association for Public Opinion Research (AAPOR). For full survey methodology, including geographic and demographic sample sizes, contact pr@forbesadvisor.com.

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