One of the most underreported news stories of the coronavirus pandemic is the damage done to the savings accounts of millions of Americans. As the economy tanked, it also struck a killing blow to people’s life savings, and many are finding out that they’ve lost hundreds of thousands of dollars. But the pandemic has also exposed the fact that many Americans never had that much money saved in the first place, and that’s just as much of a problem. In those instances, savings accounts were in trouble long before the government locked down the country.
If Americans would have saved more money beforehand, the government wouldn’t have had to pass such a large economic relief package—four packages to be exact, each more expensive than the last.
Brian Ericson wrote the following for the Foundation for Economic Education (FEE):
“For the more than three-quarters of American workers who live paycheck-to-paycheck, these furloughs and layoffs en masse could be (and already are) devastating. If just one paycheck doesn’t come in, 78 percent of Americans start to experience financial problems—so it’s no wonder that both sides of Congress came together to work out a relief package for their constituents. But it’s 603.7 billion taxpayer dollars that wouldn’t have been necessary if more Americans could depend on themselves instead of the state, and that all starts with having a personal emergency fund.
Twenty-eight percent of U.S. adults have no emergency savings whatsoever. And, for the quarter of Americans who do have a rainy-day fund, their savings aren’t enough to cover the kind of devastating job losses the coronavirus pandemic has spurred. But for workers who’ve built up an emergency fund worth three-to-six months of their living expenses, those job losses won’t be cause for quite as much financial concern—regardless of whether or not the stimulus check comes in the mail.”
In March, The Wall Street Journal reported that “many consumers can’t last very long without a paycheck, either. In a survey conducted last year by research organization NORC at the University of Chicago, 31% of working adults said missing a single paycheck would mean that they couldn’t cover necessities. An additional 20% said they couldn’t miss more than one paycheck.
Many households also carry substantial debt. Earlier this month, the Federal Reserve reported that overall household debt stood at a record $16.1 trillion at the end of the quarter.”
There is a complete misunderstanding by many people with regard to the balance of spending vs. saving. They are actually equivalent to each other. We have been encouraged as consumers to spend, spend, spend, to spur the economy. Consumers have taken on thousands of dollars in credit card charges, auto loans, and student loan payments to live up to that mantra. We have been told that spending on direct consumer goods is what spurs economic growth and that savings just sit there and collect dust.
However, unless you’re hiding cash under your mattress, you likely have that money stored in a bank, which uses that money to loan to others, who then invest in capital and consumer goods. THAT’S what grows the economy. Many consumers also invest that money themselves in financial markets and that money multiplies upon itself and contributes to economic growth.
By not saving, consumers hurt the economy and their own financial circumstances. It is important to have a rainy-day fund built up for unexpected negative supply shocks like the current coronavirus pandemic. If Americans had saved more prior to the pandemic, the government wouldn’t have had to pass such a large economic relief package to help workers who lost their jobs.
Hopefully, this is a wake-up call that will spur Americans to save more. That would be good for everybody.
And when this is all over, this may be the only way for the economy to properly recover.