Is six months enough time for a little economic perspective? Maybe. As we write, we are more than half of a year into 2023, and we wonder why last year didn't end the way we would have liked.

You remember it. At the end of 2022, we found ourselves confronting a rather curious and significant development in the U.S. economy.

According to the St. Louis Federal Reserve, personal savings in the United States fell to $686 billion, the lowest figures we've seen since the aftershock of the 2008 financial crisis in 2009. This plummet was in stark contrast to the unprecedented savings peak of nearly $3 trillion in 2020, a year dominated by the COVID-19 pandemic and its unique economic impact.

The Influence of Inflation and Rising Interest Rates

Setting the Pandemic aside, high inflation has been a persistent concern, and its impact on savings is twofold.

Firstly, inflation erodes the real value of money, meaning that the purchasing power of a dollar saved today will be less in the future.

The fact that tomorrow's dollars buy relatively less can discourage people from saving and motivate them to spend or invest in assets that may offer higher returns.

Secondly, in response to rising inflation, the Federal Reserve has initiated a series of interest rate hikes. These higher interest rates increase the cost of borrowing, reducing the disposable income of those with variable-rate debts and potentially leaving less money to be set aside as savings. They could also short-circuit productivity and growth, in our collective opinion.

The Potential Economic Implications

The decline in personal savings can impact the broader economy in several ways.

Savings form a crucial pool of funds that can be tapped into for investment in businesses and productive assets, driving economic growth. A decrease in savings, therefore, might mean less capital is available for these growth-stimulating investments.

Moreover, lower personal savings may result in higher reliance on foreign capital for investments, leading to a higher trade deficit and potential economic instability.

Lastly, lower savings rates can leave families vulnerable to economic shocks, similar to the precarious position many found themselves in during the 2008 financial crisis. Without sufficient savings, any sudden loss of income can lead to a sharp decrease in spending, exacerbating the effects of an economic downturn.

Your Actions

The prospect of high inflation can be daunting, particularly when you're trying to save and build wealth. However, there are several strategies that individuals can adopt to navigate this economic climate more effectively:

1. Reevaluate Your Savings Strategy. Traditional savings accounts may not provide a sufficient return to counteract the erosion of purchasing power caused by inflation. You might need to consider other saving and investing options that offer higher potential returns.

2. Consider Investing in Inflation-Protected Securities. In the United States, Treasury Inflation-Protected Securities (TIPS) can be a viable option. The principal of TIPS increases with inflation as measured by the Consumer Price Index, helping to maintain the purchasing power of your investment.

3. Diversify Your Investments. A well-diversified investment portfolio can help protect against inflation. Assets like real estate, commodities, or certain types of stocks can often provide a hedge against inflation, as their values may rise along with the general price level.

4. Look into High-Yield Savings Accounts. While traditional savings accounts may struggle to keep up with high inflation, some banks offer high-yield savings accounts that provide better returns. While these accounts may come with more restrictions, they could be a useful tool for safeguarding your savings against inflation.

5. Review Your Debts. If you have debts with fixed interest rates, high inflation can actually be to your advantage. This is because the real value of the money you'll be using to pay off your debts in the future will be lower. It might be a good time to lock in low-interest rates on long-term loans such as mortgages. However, if you have variable-rate debts, be prepared for the interest rates to rise in response to inflation.

6. Focus on Long-Term Financial Goals. Despite the economic uncertainty, it's important not to lose sight of your long-term financial goals. Continue to set aside money for retirement, and if possible, increase your contributions to retirement accounts. Over the long run, these investments can grow significantly and offer you a comfortable nest egg despite periods of inflation.

Everyone's financial situation is unique, and what works for one person may not work for another. Consider consulting with a financial advisor to devise a strategy that is most suitable for your specific circumstances and goals. Despite the challenges of inflation, with careful planning and strategic actions, it's entirely possible to continue saving and building wealth.