Americans Are Draining Their Savings As Economic Outlook Grows Dimmer

U.S. savings accounts are getting a one-two punch as Americans are raiding their accounts, but not replenishing them.

Nearly half (46%) of adults say they’re investing and saving less than usual, according to the latest Forbes Advisor-Ipsos Consumer Confidence Biweekly Tracker. That’s an eight-point jump from four weeks ago and the highest level since Ipsos began tracking the data in November 2021.

Meanwhile, 29% of those surveyed said they’re drawing from their savings more than usual.

It’s not surprising that people are squirreling away less while dipping into their reserves as the dollar’s purchasing power weakens. The pernicious combination of inflation, aggressive interest-rate hikes by the Federal Reserve, and a significant jump in household debt in the second quarter of 2022 has paved the way for major financial hurdles.

Leaning on your short-term savings while you battle persistent inflation might be unavoidable—and it’s likely the most responsible way to pay for necessary expenses, says Andre Jean-Pierre, an investment advisor at Aces Advisors Wealth Management in New York.

Racking up credit card debt is the real problem in a rising-rate environment. The average interest rate on a credit card account that’s assessed interest was 16.65% in May 2022 (the latest data available from the Federal Reserve), two points higher than at the beginning of the year.

“In America, where many households are living paycheck to paycheck, the impact of inflation is felt daily,” Jean-Pierre says. “But adding increasing interest by paying with credit can have a cascading effect on your financial life.”

Consumer Confidence Sinks Below Pre-Pandemic Levels

Though Americans are feeling the continued sting of inflation, they have been spared the defeat of a struggling labor market. Throughout 2022, unemployment has remained low; it’s currently at 3.7%, according to the latest Bureau of Labor Statistics (BLS) jobs data, giving workers power in an uncertain economy.

But the weight of rising housing costs, energy bills and other expenses—coupled with the bold maneuverings of the Federal Reserve to battle continued inflation—is shaking consumer confidence.

The overall confidence index of 50 (out of 100) is seven points lower than it was at the beginning of the year and 10 points lower than where it was before the pandemic.

The current financial index, which measures confidence in personal financial situations and the local economy, sits at 38.7—6.2 points below its pandemic and historical averages, gaining just one point from two weeks ago.

Similarly, the investment index, currently at 40.2, is 7.7 points lower than its historical average and 14.4 points lower than its pre-pandemic level. Low confidence in investments is practically a given at this point, with stocks tanking, 401(k) accounts shrinking and quick-money startups folding.

The Labor Market Continues to Stay Strong, but May Buckle Under Severe Rate Hikes

The area of their financial lives where people continue to be most confident is the labor market, with a reading of 65.2.

Forty-nine percent of adults say that, compared to six months ago, they’re more confident about job security for themselves, their family, and personal acquaintances—three points higher than two weeks ago.

But the robust labor market might have cracks in its veneer.

The Federal Reserve raised target rates by another three-quarters of a percentage point on Sept. 21 and promises more aggressive hikes until inflation hits their goal of 2%, which will likely boost unemployment numbers.

“If we want to light the way to another period of a very strong labor market,” Powell said in his speech following the announcement, “we have got to get inflation behind us. I wish there was a painless way to do that. There isn’t.”

Forbes Advisor recently asked more than a dozen analysts, CEOs and economists about the jobs market, and more than 60% agreed that the Fed’s bullish monetary policy will eventually increase unemployment rates.

Matthew Sassani, a financial advisor at Irvine Wealth Management in Irvine, California, says that the effects of the rate hikes are much like traveling on a bus that’s going fast. “When the bus suddenly stops, everyone falls forward.”

Last year was marked by appreciating real estate, a strong stock market and generous consumer spending. “But now interest rates are eating into purchasing power, which will affect business and employment, and people have to adjust,” Sassani says.

The best thing consumers can do now is to prepare for a major downturn. That means holding off on big purchases—especially if you have to use a credit card.

You should also talk to your financial advisor about your investments to ensure they’re still on track to meet your short- and long-term financial goals. Don’t make hasty decisions based on market fluctuations. Reshuffling your portfolio is even more critical for people nearing retirement or on a fixed income.

Survey methodology: Ipsos, which surveyed 942 respondents online on September 19 and 20, provided the results exclusively to Forbes Advisor. The survey is conducted biweekly to track consumer sentiment over time, using a series of 11 questions to determine whether consumers feel positively or negatively about the current state of the economy and where it looks to be going in the future.