What is the personal saving rate?
The personal saving rate is an estimate the federal government calculates from national payroll data and consumer spending approximations.
- First, the Bureau of Economic Analysis (BEA) subtracts payroll and income taxes from gross income to determine disposable personal income, or DPI. That's money that is available for consumers to spend.
- Then, the BEA subtracts personal outlays from the DPI to see what's left over. "Outlays" include everything from your rent or mortgage to food, entertainment, goods and services. What's left after that is savings.
- Finally, the BEA divides savings by the DPI to arrive at a personal saving rate — the percentage of income not spent on outlays.
The US personal saving rate is not everyone's personal saving rate
The figures for the economy as a whole don't tell the entire story, of course. Those who lost jobs and whose unemployment checks have not yet arrived are unlikely to be saving much. If you are in survival mode, don’t feel bad that you’re not saving money now.
Consumers who have well-paying jobs and work from home are likely the major beneficiaries. But the $600-a -week boost to normal unemployment benefits mandated by the Cares Act may provide more income to low-wage earners than they were making while employed. Everyone's situation is different.
How to calculate your personal saving rate
Here is an example of how an individual household could calculate its saving rate.
If you earn $4,000 per month, pay $1,000 a month in taxes and spend $2,500 a month on everything you buy (including finance charges), your disposable personal income and personal saving rate would look like this:
- $4,000 gross income - $1,000 in taxes = $3,000 DPI
- $3,000 DPI - $2,500 outlays = $500 savings
- $500 savings / $3,000 DPI = 16.7% You can track your own personal saving rate month by month. It's a great way to establish an emergency fund, avoid overspending and improve your financial future.
How did savings go up when income went down?
Why did this savings increase happen during a pandemic when personal income fell by 2%? Personal spending also fell — by 7.5%. The shelter-in-place and work-from-home rules enacted by most states kept many businesses closed and spending opportunities limited.
In addition, the consumer confidence index plummeted from an enthusiastic 118.8 to a stunned 86.9. The Consumer Confidence Index measures how consumers feel about their near-term economic prospects. Economists believe it's important because confidence is a good predictor of consumer spending. Consumer spending drives two-thirds of the US economy.
MoneyGeek’s Coronavirus Consumer Impacts Survey from March 2020 echoes the Consumer Confidence Index, as 54% of respondents said that they had lost or expected to lose income. Forty-five percent of respondents also reported delaying purchases in response to COVID-19.
Spending dropped off the most in these categories:
- Health and dental care, as many states banned elective procedures.
- Spending on travel, hotels, restaurants and recreation plunged as most Americans stayed home and these businesses remained shuttered.
- Automobile purchases were put on hold as dealerships closed, and consumers decided to put off purchases in a shaky economy.
The personal saving rate in the U.S. historically increases in times of economic uncertainty. An increased savings rate helps us get through hard times when we anticipate them.
How to bank your bonus and protect your savings
Extra money may be available from one or more of these sources:
- You spend less because there are fewer opportunities to spend.
- The Cares Act may have brought some extra money your way if you are eligible.
- Your unemployment compensation boost of $600 per week plus your standard benefit could exceed your former income.
If you don't create a plan for that money, it could be a missed opportunity as it evaporates with regular spending.
What should you do with your $1,200 coronavirus check?
If you're still earning and don't need the additional money, think of how you might best use it.
- Pay down high-interest credit card debt.
- Add it to your child's tuition savings.
- Top up your retirement account.
- Use it to start an emergency fund if you don't have one.
Some mutual funds let you start with an investment as low as $1,000. That first coronavirus check could establish a new habit and provide a little security for your family. So if you don't need it, don't use it.
How to make the most of your coronavirus savings
If you're lucky enough to be working and your paychecks are just sitting there in your checking account, it's time to act. You're getting the equivalent of a bonus, and if it sits in your checking account, you are depriving yourself in two ways:
- The interest income is low on most of those accounts.
- The money you saved during lockdown will be sitting there waiting to be spent when you get out.
You should assess your situation now and create a plan for your bonus money.
- If you're carrying high-interest debt, now's the time to get rid of it. Making only minimum payments hardly makes a dent in your debt. Take every cent you're saving and put it toward your revolving debt.
- If you don't have debt, establish emergency savings, or increase your balance until you have a sufficient cushion. Depending on your industry and whether you receive a salary, commission or self-employment income, your magic number is enough to cover two to 12 months of living expenses.
- Once you've covered your immediate needs, look to the future, and sock away as much as you can for retirement or a future purchase like a home. You can do this by setting up automated transfers from your checking account to a savings, retirement or investment account.
What about the economy? Is it smart to invest in stocks now?
The economy has been volatile, and that scares many consumers. But seasoned investors know that volatility creates opportunity. And historically, stocks have been the investment with the best rate of return — even when you include the Great Depression.
You can take advantage of this volatility with a technique called dollar-cost averaging. Dollar-cost averaging means selecting an investment — it's safer to do this with a mutual fund than a single stock — and investing the same amount of money in it regularly. Every pay period is a good choice.
If the fund value goes down, you get more shares with that period's investment. And if the value goes up, you'll get fewer shares for your money, but the value of your entire investment rises.
Alternatives to stocks
A more conservative way to save and get a better return than your checking account is a certificate of deposit (CD). Yes, the short-term ones don't pay very much. But longer terms do. You can increase your return and avoid tying up all of your money for years by "laddering" CDs. "Laddering" means buying several with different maturity dates.
You can choose a three-month CD, a six-month CD, a one-year CD, etc. If you are not the most disciplined saver, the CD offers a considerable advantage. You can't just hit an ATM and spend it whenever you get the urge. It essentially saves you from yourself.
Habits to keep when the pandemic fades
When the coronavirus pandemic comes to an end, there will be what economists call "pent-up demand." Wanderers will book travel. Fashionistas will hit the shops. Foodies will worship at every restaurant. We'll be driving again, and our kids will want the latest everything.
But we are learning some great lessons in lockdown:
- How to have fun for free
- What's most important is our health and the health of our loved ones
- We can live on less
- Spending less than you earn can help you sleep better
- When we eat out less often, it's more special — and we can cook food that our families will actually eat
So when the pandemic lifts, spending less than you did before COVID-19 could improve your financial outlook. Stick with your plan to get out of debt, buy that home you’ve been dreaming about or have a comfy retirement. You may have to adjust the amount you direct to repayment, investing or savings, but don't kick the habit entirely.
Gina Pogol is an acknowledged personal finance specialist and a writer for MoneyGeek who has written for over 20 years about personal finance topics ranging from mortgage and real estate to taxes and credit.
MarketWatch. “U.S. savings rate jumps to highest level in 39 years.” Accessed April 30, 2020. MarketWatch. “Consumer confidence suffers record drop in April, but Americans more hopeful of future.” Accessed April 30, 2020.
MarketWatch. “Consumer confidence suffers record drop in April, but Americans more hopeful of future.” Accessed April 30, 2020.
Bureau of Economic Analysis. “Definitions and statistical conventions.” Accessed April 30, 2020.