This Content Is Only For Paid Member
A recent Federal Reserve study highlighted a concerning trend among American households, particularly those outside the top 20%, as reported by Bloomberg. The study revealed that, since the onset of the COVID-19 pandemic, a significant number have depleted their extra savings, resulting in fewer liquid assets compared to their pre-pandemic financial status. If you find yourself in this situation, here are some strategies to consider, possibly with the guidance of a financial advisor.
The Federal Reserve study, conducted in June, disclosed that the bottom 80% of households by income have experienced a decline in bank deposits and liquid assets when adjusted for inflation since March 2020. This marks a significant shift from the initial stages of the pandemic when factors such as government financial support and restricted spending opportunities during lockdowns led to an accumulation of excess savings.
While all income groups witnessed a decrease in real-term cash balances from the peak in 2021, the disparity is noteworthy. The wealthiest 20% of households still maintain cash savings approximately 8% above their pre-COVID levels, whereas the poorest two-fifths have seen an 8% decrease, and the middle class has observed a fall below pre-pandemic levels.
This situation suggests a diminishing financial buffer for a majority of U.S. consumers, raising concerns about a potential economic downturn. The Federal Reserve Bank of San Francisco predicts that the aggregate stock of excess savings may be exhausted in the current quarter.
Despite challenges for individual households, the overall household net worth in the U.S. surged by about $5.5 trillion in the April-June period, reaching a record high. This increase, driven by gains in the housing and stock markets, primarily benefits wealthier households that are more likely to own stocks and real estate.
For those not in the top income bracket, maintaining financial stability involves prudent budget management, strategic debt reduction, and wise investment choices.
Key Strategies:
- Budget Management: Create and adhere to a budget, understanding where money is spent and identifying areas to cut back. Allocate resources to critical areas, such as building an emergency fund.
- Debt Reduction: Prioritize paying off high-interest debt, particularly from credit cards, seeking financial advice if needed.
- Diversify Investments: Explore alternative investment options, such as startups, alongside traditional stocks, considering potential long-term gains with careful research or consultation with financial experts.
- Diversify Income: Consider part-time jobs or freelance work for additional financial cushioning. Stay informed about government assistance programs and tax benefits.
- Financial Education: Learn about financial management and investment strategies to make informed decisions positively impacting financial health.
As households grapple with these challenges, a combination of these strategies can contribute to maintaining financial stability and weathering economic uncertainties.
