Aug 22 2013

Why You Should Save Money in Times of Prosperity

Piggy Bank with savings messageRecently, DepositAccounts.com featured our Homerun Rates 60 month CD, to highlight the benefit of the penalty-free withdrawal option as CD rates begin to rise. These rising rates should encourage those looking to rebuild savings from the recent recession. Guest writer Patrick Russo of DepositAccounts.com explains.

Consumers Credit Union is offering deposit account specials with increased interest rates across several offerings, including competitive Money Market and CD accounts. These and other rate bumps are a good sign for the economy and offer encouragement to consumers trying to rebuild their savings from the recent recession. These enticing rates may even motivate consumers to buck a surprising trend: the fact that, historically, savings have not increased as the economy has improved.

An economic data graph from the Federal Reserve shows that periods of recession in the United States cause increases in personal savings among consumers. In fact, with only one exception in the 1970’s, every period of recession has seen a corresponding increase in the personal savings rate. Personal savings begin to fall after each recession period ends, however, and have been on a consistent downward trend since the mid-1970s. Why is it that, overall, we save more during recessions and less during the “better” times?

Without diving too deeply into consumer psychology, one common sense reason is that consumers tend to have more doubt about the future in times of recession than in times when the economy is performing well, so they save more and spend less. Some economists believe that this savings mentality is a crucial component to national economic growth, as it fosters deferred consumption among individual consumers, which in turn leads to more sustainable and substantial long term growth. Put simply, if those economists are correct, then saving money in the short term is better for the economy in the long run, even in times of prosperity.

Contrary to this mentality is the current reality, and a Federal Reserve that is trying to draw consumers’ money out into the economy by intentionally making it difficult for banks and credit unions to create strong incentives to save through higher interest rates. The low interest rates that most bank accounts are paying on customers’ deposits are somewhat less attractive than the low interest rates customers can pay for borrowed money (i.e. loans), the latter of which they will in turn spend on goods like cars and houses.

With more incentive to spend, it should come as no surprise that savings have not been a financial priority for many American families, even as their financial outlook continues to improve. The average amount of liquid savings is currently about $3,200 per family—and the number of families who save any money at all has dropped by nearly 10% since 2001. (With an average of more than $5,300 per family in savings, Consumers members demonstrate a commendable higher than average commitment to saving.)

Institutions like Consumers Credit Union are part of the recent uptick in deposit rates, which is a positive incentive for savers hoping to reverse that trend, especially those who believe that savings, and not just immediate consumption, lead to more reliable and sustainable long-term prosperity for all of us.

Patrick Russo writes for DepositAccounts.com, a website that monitors products and rates at more than 7,500 banks and credit unions and pairs that information with comprehensive commentary, reviews, tools, and community forums to equip and guide depository banking consumers.

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