What Happens If Everyone Starts Saving More?

Several readers sent me a link to this article from CNN Business entitled New threat to the economy: Americans are saving like it’s the 1980s.

Before I start digging into the core of what this article is saying, I want to make something very clear. People choosing to save money is not threatening. People choosing not to spend and instead build up their own economic future is not “hoarding,” as the first line of the article suggests. Those are intentionally negative words which try to create the ridiculous assumption that a person choosing to save rather than spend is somehow a bad personal choice. That’s nonsensical and actually runs counter to sensible personal finance principles, and I’ll touch on this again later.

The article’s main point is that people do what they always do during an economic downturn: they spend less and save their money.

Everyone recognizes that spending every dime you make is a risk. It means that if the unexpected happens, you’re going to be in trouble. When times look good, people are more willing to spend and take financial risks; when times look bad, people are less willing to spend and take far fewer risks. If it looks more likely that an unfortunate event — like a serious illness or a job loss — might cross your plate soon, you’re going to spend less money, and that sentiment is on virtually everyone’s mind right now.

This is a normal, healthy, human response to a crisis. We all want ourselves and our families to make it through a crisis with as much financial stability as possible. No one wants to lose their homes. No one wants to be evicted. If a person feels that such outcomes are more likely than before, then they’re much more likely to spend less and save more, because that is going to preserve those core things they care about the most. No one should ever feel guilty for choosing to save money and spend less on non-essentials in a crisis — period. Media reports that try to use words like “hoarding” to make a smart response to a crisis seem bad are ridiculous.

What does that mean for the overall economy, though? The article mentions that savings rates — the percentage of their income that the average American saves in a given month — almost doubled from February to March. People were saving at an 8% rate in February, then this jumped to 13.1% in March, and it’s virtually certain that a similar jump will occur in April once that data is available.

That money is going into savings accounts or staying in checking accounts rather than being spent at stores and restaurants.

What this all comes back to is the idea of consumer confidence. If people feel confident about the future, particularly in the fairly short term, they’re more likely to spend money on non-essential things. If people don’t feel confident about the future, particularly in the fairly short term, they’re less likely to spend money on non-essential things and will keep it in savings. The higher consumer confidence is, the more money will be spent on non-essentials — restaurants, non-essential shopping, travel and entertainment.

Right now, consumer confidence, by any measure, is super low. The measure of consumer confidence most frequently used in the United States is the Consumer Confidence Index, which showed a steep drop in March and April 2020, meaning that people are far more predisposed to save money rather than spend it than they were even a couple of months ago.

What does all of this add up to, though?

First of all, businesses should not expect customers to spend at the same rates as they were at the start of the year, particularly if their business isn’t addressing core needs. In periods where consumer confidence is low, the things that people cut are their less-vital wants and desires. They don’t stop shopping for groceries, but they might stop going to movies or to fancy clothing stores. Businesses that focus on fulfilling those less-urgent whims and desires are going to be the ones that struggle the most.

Those businesses are going to have to figure out how to run in a leaner fashion or else find ways to appeal to customers who are less inclined to go out and spend. That’s going to look different for different businesses. I’ve seen businesses start offering home deliveries. I’ve seen businesses offer pretty aggressive sales. I’ve seen businesses go lean by cutting back on staff or reopening with only partial staff.

That can, in itself, lead to even lower confidence. If people see businesses letting employees go, they can begin to feel more worried about their own financial situation and buckle down even more. That’s a natural, normal response — there isn’t anything wrong with it, and it’s what people should be doing right now unless they have a healthy amount of money already stocked away for emergencies.

How do we emerge from that cycle? There are a lot of things that can happen and need to happen.

First of all, most people need to feel as safe going to those businesses as they did in January and February. Part of the equation right now is that customers need to feel safe actually going to the businesses to spend money so that those businesses can continue to exist and employ people. Part of that is going to be a continued public health focus on getting coronavirus case numbers lower and on a sustained downward trend, with the emergence of a vaccine being the ultimate goal on that list. Regardless of your feelings about coronavirus, the truth is that you won’t see a return to January levels of consumer confidence until the public health numbers drop precipitously and people feel confident about the future of their own employment. Another part is that individual businesses do as much as they can to maximize safety (or the appearance of safety) for people choosing to use their products or services, which may help some people on the fence to choose to return.

This will take time. It will take time for numbers to decline, which will raise the confidence of some. It will take time for a vaccine to emerge, which will raise the confidence of others. It will take time for businesses to stabilize and people to feel confident about their own financial future so that they feel confident to spend again.

Second, government intervention can help support many businesses while also incentivizing customers to return. Governments will recoup that money over the long run via taxation because of the way money cycles through the economy. There are many, many ways this can be done — stimulus checks, marketing campaigns and so on. I fully expect to see more stimulus checks in the fairly near future. I also expect to see a lot of marketing encouraging people to spend more, likely as a patriotic or civic duty.

Remember, it is not your patriotic or civic duty to spend money on things you don’t want or need, particularly if doing so would undermine your financial future. The Simple Dollar always focuses on individual financial responsibility, and spending money on non-essentials is something that should always be considered with care.

Third, some businesses will go under, while new businesses step up. That transition is always painful for everyone involved. As demand falls in some areas, businesses serving that collapsed demand will go out of business. As new opportunities appear, businesses will appear to take advantage of those opportunities.

I’d like to point to Zoom as an example of this. In February, Zoom was largely unheard of. By late April, a lot of people had quickly become familiar with it as a tool for virtual meetings. That’s a business that appeared to take advantage of an opportunity.

Another example: a small business popped up very rapidly in our community, facilitating a very simple way for people to have groceries delivered. Although this business probably won’t continue at the current level of success that it has been enjoying, it’s currently providing nearly full-time work for multiple people.

Every time things change, there are opportunities, and where there are opportunities, businesses appear to take advantage of them. Contactless delivery services are thriving right now, for example. Services delivering quality home entertainment are doing well.

When people start saving more, that means the needs and wants of the customer have changed, and businesses will adapt to meet that change. Usually, we don’t see such rapid change in the wants and needs of customers as we see right now, so the road from pre-coronavirus to post-coronavirus may be bumpy.

What does this all mean for you?

Let’s look at all of this through a practical lens.

First of all, if you’re saving money and spending less on non-essentials because you’re concerned about the future, you’re doing the right thing for yourself and your family. That’s what you should be doing. Your future and your family’s future are paramount. During times of uncertainty, you should be getting rid of debt and building an emergency fund. There will be a lot of messages out there that say you shouldn’t be saving and preparing, and instead, you should be spending. It’s up to you to decide how to split your dollars going forward, but you are never making a bad choice to save or to pay off debt. Those are always wise moves.

Second, the road will be bumpy until consumer confidence turns around, and that relies (in this current situation) on public health data. As public health data improves, as people feel that their work is stable, and particularly if/when a vaccine appears, consumer confidence will improve. As people see less and less risk for themselves and their loved ones when they go out to eat, go shopping and travel, they’ll return to those things in some fashion. If you want to see a leading indicator of things turning around economically, watch the actual rise and fall of coronavirus case numbers as well as the expected timeline of a vaccine. People are always free to choose what they want to do by assessing risk for themselves, and as the data available to people shows less and less risk, they’re going to be more and more open to spending, and the more open to spending they are, the more the economy will improve.

What do you do when the road is bumpy? You save. You build up your emergency fund. You get rid of debts. A turbulent moment is not the moment to stretch out your spending.

Third, there is going to be a lot of pro-spending marketing and some likelihood of additional stimulus money. Those things will exist to convince you to spend. My advice: take that money and do what you think will benefit you the most, whether that’s spending or paying off debt or whatever. Remember, you have no obligation to spend for the sake of spending – be smart about your decisions, no matter what the situation.

Fourth, as people build up emergency funds and stabilize their situations, they’ll feel a little more confident to spend. With all else being the same, someone with no savings is going to be less confident in spending than a person with six months of living expenses in a savings account. The person with the emergency fund knows that if things get tough tomorrow, they’ll be OK, so it’s not as risky to spend right now. Again, this takes time. It’s another part of rebuilding consumer confidence.

Finally, some businesses will fail, other businesses will hone in on what customers want right now and new businesses will emerge; that’s actually a good thing. There are going to be a number of familiar businesses, both small ones and big ones, that fail in the coming months. Others are going to change, likely providing more and more robust services that cater to people continuing to practice social distancing or working from home. Others will pop up, taking advantage of the changes in ways we never thought of. That’s healthy. It means that businesses are finding new ways to succeed in the current environment. It also means that there will likely be new and interesting types of businesses and offerings in the coming months and years. Think of how many businesses transformed or emerged after the 2008 economic crisis. Netflix, at that point, mostly offered DVDs by mail. The iPhone was a novelty. Instagram didn’t exist. The idea of an electric car was a fringe idea. Airbnb didn’t exist, nor did Uber or Lyft — how we get around and travel changed a ton. Periods of change and challenge give birth to new and great things.

The magic ingredient in all of this is time and patience. It will take time for health concerns to resolve. It will take time for businesses to fully adapt. It will take time for people to build savings and feel more confident about their situation. Be patient. Things may not be better tomorrow, but they will get better. It just takes time and patience.

Good luck!

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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  • Courtney Mihocik
    Courtney Mihocik
    Loans Editor

    Courtney Mihocik is an editor at The Simple Dollar who specializes in personal loans, student loans, auto loans, and debt consolidation loans. She is a former writer and contributing editor to Interest.com, PersonalLoans.org, and elsewhere.