The Covid Recession Offers a Chance to Save Money
(Bloomberg Opinion) -- Best personal finance tip in this recession? Say “Good bye, Amazon” and “Hello, Vanguard.”
This pandemic could be a once in a lifetime break in your spending habits, and a breakthrough for your saving habits.
If we’re spending less on stuff we don’t need, that’s a good thing. Electronics, appliances, sporting goods, home furniture and new cars are “Veblen” goods (named after the early 20th century economist) which a person usually buys to establish their status and induce envy in others. But these purchases have been shown to produce very little long-lasting satisfaction to the purchaser.
And indeed, some Americans have been able to save during this strange time: The saving rate increased from 8.2% in February to 33% in April, the highest rate in recorded economic history. It was lower but still quite high in May, at 23.2%.
My advice? Turn this odd development into your personal advantage. Saving in a recession is a good idea for two reasons: one, you’ll need the money for retirement; and two, saving now means you can get a good deal on assets that may be below market value.
Funneling what you can into your retirement savings can help you make up for any money you may have lost if, during this crisis, your employer stopped contributing to your 401(k). About 12% of employers say they’ve cut such contributions already, and another 23% say they may do so later this year. Those “contribution holidays” really can hurt your retirement security.
Say you planned on saving 10% of pay for retirement for 36 years, including your employer’s contribution. But mid-career, one of your employers skips a year. The consequence is that your retirement savings at age 65 will be 5% less. Perhaps it happens again, and two of your employers take contribution holidays during your career. Your retirement income is now down a permanent 10%. (The same logic holds if you’ve had a period of unemployment — and such gaps are not uncommon for someone going through two or three recessions in a lifetime.) If you’ve managed to save during this time, you can make up for those gaps now.
A second reason for saving during a recession is that investing means you’re doing what the rich do in recessions. Asset values — stocks, bonds, property — are still lower than they were in February — making a recession a good time to buy for the long term. Those with cash can buy low and sell high (much) later.
Usually it is, primarily, the wealthy with cash in recession. This recession is different. All but the highest income households received $1,200 stimulus checks and $500 per child. Those with bank balances below $3,000 most likely already spent all of it — the working poor have been hit especially hard by this downturn — but those with a little more financial cushion still have a chance to save.
And indeed, the people with more income are the ones who especially dropped their spending, according to Harvard data analyzed by Vox. On the other end of the spectrum, people with low incomes are the ones who especially saw their income increase, thanks to federal stimulus and unemployment benefits that amount to an extra $2,400 per month.
All this means that for many people, if not quite all, this odd recession provides an opportunity to save for retirement, or at the very least create a cash cushion. Cash will be essential as we’ll likely see another economic dip if businesses close again due to new waves of Covid-19 cases, especially if Congress doesn’t extend income supplements to families and small businesses.
In an otherwise dark recession, a chance to build savings is a bright spot.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Teresa Ghilarducci is the Schwartz Professor of Economics at the New School for Social Research. She's the co-author of "Rescuing Retirement" and a member of the board of directors of the Economic Policy Institute.
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