Recession Lessons: Saving Habits

RECESSION LESSON: The silver lining of the economic downturn

Savings is the process of setting aside a portion of current income for future use, or the resources accumulated in this way over a given period of time. (Brittan- nica.com)

came worse as the recession entered the Changes in savings picture, bringing tighter access to credit, a Explanation of habits during the housing foreclosure crisis and a dismal job savings recent recession market. If that wasn’t enough, the coincid- ing financial crisis made the effects of the There may be a silver lining to the re- During the last 10 years, consum- downturn even more severe. cent economic downturn - Americans are ers racked up monumental personal debt Consumers recoiled from spending as saving again. Consumers are closing their through the expansive use of credit for the reality of these changes hit. They began wallets and socking money away in a way purchases. Easy loans and payment plans to exhibit thrifty behaviors, such as paying that hasn’t been the norm for quite a while. were enticing to many who wanted the lat- only with cash and budgeting for essentials. The nation’s personal savings rate, which est and greatest gadgets, TVs and cars. The The importance of “paying yourself first” was almost zero just two years ago, has ris- quest for the best extended to the housing through saving a portion of disposable in- en to about five percent. That’s the highest market as qualifications requirements for come became increasingly popular. Many rate in 15 years, according to the U.S. Com- home mortgages relaxed and consumers began to have savings dollars taken directly merce Department. Will this trend continue were able to purchase houses with little or out of their paychecks and deposited in past the recovery period? Have Americans no down payment, and less regard for their bank, credit union or retirement accounts. finally internalized the importance of saving ability to make future payments. Americans embraced the philosophy of let- for financial well being? Personal savings rates were very low ting their money work for them to build a during this time period. For most Ameri- cushion for emergencies as they hunkered cans, that translated to no saving for a rainy down to withstand the faltering economy. day, no contributions to a retirement fund As a result, the personal savings rate began and no cushion for emergencies. Bad be- to climb in 2007.

www.KansasCityFed.org Lessons learned about savings

Saving money is a lot like eating healthy. You know you should, but it’s hard to do. To save successfully takes planning, discipline and commitment. Once a savings routine is devel- oped, the habit of setting aside a portion of income becomes more ingrained. This recession jolted consumers out of careless spending be- havior and forced them to reassess their wants and needs. They began the task of cutting back on purchases and delaying gratification in order to save for potential emergencies. There’s an interesting twist in the role of sav- Historical example ings as the U.S. enters the economic recovery. of saving habits: aftermath While savings is good for the individual even in of the Great Depression the short run, it’s not very advantageous for an economy climbing out of a recession. A recov- The Great Depression was the worst ery somewhat depends on people’s willingness War II, the savings rate grew as soldiers’ economic catastrophe of the 20th century to buy, which is why various programs were wages were deposited into Victory bonds and possibly the worst in our nation’s his- introduced during the economic downturn to and passbook savings accounts. By the tory. From 1929-1933, the quantity of goods spur consumer spending. That being said, sus- war’s end, savings rates were an astonishing and services produced in the U.S. fell by tained personal saving, preferably closer to 10 25 percent. one-third, 25 percent of the workforce percent, is one of the best ways to ensure a was unemployed, the stock market lost 80 strong economy in the long run. The trick is to percent of its value, and some 7,000 banks find the proper mix of saving and spending. It failed. might help to turn to the lessons Goldilocks This economic disaster was so devas- learned in her search for the perfect porridge: tating that it affected an entire generation’s not to hot (spending too much), not too cold view on money and savings. The saying (saving too much), but just right (a balance of then was that Americans began to squeeze saving and spending). their pennies until Lincoln grinned. The belt-tightening was so severe that it affected people’s ability to satisfy basic needs; wants weren’t event considered. To exist during this time period, people learned to live below their means and question every purchase. As they survived the lean years, saving money was ingrained in their every though and action. By the start of World

www.FederalReserveEducation.org The following charts describe the U.S. savings rate both over time and in relation to other countries.

Personal Savings as a Percent of Disposable Income

Source: Bureau Economic Analysis

Personal Savings as a Percent of Disposable Income

Source: Bureau of Economic Analysis, OECD

www.KansasCityFed.org Activity 1 Activity 2 Make the topic of savings habits real by To further explore the methods that rates and fees for each method of savings. discussing the ways students or their fami- can be used to save, ask students to brain- Ask groups to develop a chart or table lies have cut back on purchases in order storm the types of interest-bearing bank listing each account at their bank, with inter- to save money during the downturn. Ask if accounts they are familiar with. These ex- est rate and fees, as well as the advantages any of the money saved was put aside in an amples should include: savings account; and disadvantages of using this method as a account for future use. Discuss the emer- interest-bearing checking account; money savings vehicle. Share charts with the class gency situations that families might need to market account; certificate of deposit; and and choose the top three financial institu- plan for by accumulating additional savings investing in savings bonds. Tell students that tions with the most competitive rates. (for example: job loss; healthcare and hos- they will be researching different financial pitalization; home or car repairs, etc.). institutions to find information on each sav- Tell students that they will be conducting ings tool, including current interest rates, to interviews with friends or family members see which options are the best for them to to better understand changes in savings increase their savings. Assign small groups habits during the downturn. Help students to several local financial institutions, includ- develop possible questions to use in their ing commercial banks and credit unions. interviews. Examples of questions might Give them website information for class- include: Did you try to save money before based research. Students could also visit the recession began? Have you spent less their bank to pick up financial literature on money in the last two years? Did the events of the downturn influence you to save more disposable income? Students should complete at least three interviews on their own and share the results with the class. A comparison of class results could be done to see if the savings rate for the groups sur- veyed increased over this time period.