Newsletter by Mary Buffett
There is an economic behavior that repeats itself whenever we go into a downturn—the savings rate increases. When you think about it, it makes perfect sense. During any downturn, we are jolted from our daily expectations and we put the brakes on our spending. We worry about losing a job, or how a financial downturn could hurt our business, so we save. Vacations or other larger ticket items get placed on the back burner and we go through our budgets to see what we can live without—at least for the short term.
In the years prior to the Great Recession, the savings rate hovered at 3.4% between 2005 and 2008. It seemed that money was being spent as quickly as it was being paid out. Then the economy collapsed in the fall of 2008 and for the next four years, the impact of the downturn shattered our confidence in the economy. Perhaps as a result, the American savings rate began to increase between 2008 and 2012. At its peak, Americans had a 12% savings rate in 2012, but as the economy began to improve, savings rates began to tumble back to earth.
For the next decade, the national savings rate seemed to fluctuate between 5% and 9%. One might think that some of the lessons from The Great Recession took hold. Then in March of this year, COVID-19 exploded on to the national landscape. Instead of worrying about holidays or vacations, people stressed out about having enough toilet paper. Not only did personal spending stop dead in its tracks, but also the savings rate skyrocketed to historic levels.
In April, the savings rate jumped to an unheard-of 33.7% before sloping back to 13.6% in October. However, the October rate is still above the savings totals from The Great Recession. With the pandemic entering into a more dangerous third wave, we remain months away from vaccines that are readily available for public consumption. Even with the holiday season upon us, a third wave might bump the national savings rate upwards as the recovery stalls.
However, there will come a time when some sort of normality returns to the American landscape. Before we backslide into our bad habits, perhaps we can create some new ones—some better ones.
We will pass through this difficult moment and vaccines will have a lasting impact on our national psyche. Life will improve. So, let’s use this moment to plan for the future. In the past, we promised ourselves that we would do things better “next time”. We told ourselves that we would create a portfolio in case of a layoff or a “rainy day”.
Well, “next time” is now. We should learn from our mistakes, actually live below our means, and invest the rest. Or else we will end up like a lobster that is slowly boiled to death for somebody else’s dinner plate instead of doing the right thing.
So now is the right time to embrace our grandmother’s admonition and plan for a rainy day. Since 1945, there have been 13 recessions. It’s fair to predict that there will be another 13 between now and the next 75 years. So, let’s hardwire these lessons so that we can smooth out life’s difficult bumps.
Max out your 401K contributions. Right now, the average American invests only 6.9% of their salary (the number increases to 10.6% with an employer contribution) to their 401K plans. The maximum contribution is $19,500 (it’s a little more if you’re over 50) but there is a lot of room here for financial growth and the tax advantages speak for themselves. So, if you have room to expand your contribution, do it. Find the right route to get to a maximum contribution, either by immediately flipping the switch or moving to that percentage gradually over a period of 6 months.
Open an investment account. For those who receive annual bonuses or a commission payout, they should be deposited there. Keep a third for yourself but plow the remaining two-thirds into your portfolio. Here is the good news. Most of these investment accounts are easy to open—and they are all created online. This means no long lines, no hassles with any tellers, or any of those nightmares we experience at banks.
Build out a side-hustle. Promise yourself that you will fund your investment portfolio. Side-hustles began to get a greater spotlight as people used them to gap their declining income during The Great Recession. However, some enterprising people have kept their efforts going and have an expanded revenue stream for themselves and their families. Economic writers have long written that side-hustles can and should be used to build out a long-term investment strategy to help fund your retirement. According to the Harvard Business Review, the average side-hustle nets about $5,000 per year. Again, like bonuses, take a third for your own enjoyment but place the other two-thirds into an investment account.
My point today is that life will get better. The good and bad times will run their course. We should all use these unfortunate moments to take stock of what works—and what does not—within our financial lives. In the end, we must create our own financial futures that keeps us happy during good times and creates our own safety net when things go off the tracks.
We have a couple of choices. We can be like that lobster that is slowly boiled, or we can take control of our financial futures and address it with the same discipline as we do with other parts of our lives.
Let’s get there together.