Aug 31, 2023

Are You Saving Enough?

Are You Saving Enough?

Recent economic patterns have unveiled a shift that affects our financial stability, demonstrating a connection between how the government supports the economy and the interest rates we face. Savings, which represent our financial safety net, are showing a decline due to the winding down of government stimulus programs and an increase in interest rates. This impacts those who borrow money, particularly credit card users who now need to allocate more funds to cover their debts due to the sudden surge in interest rates. This has led to a historic milestone: the total sum of money owed on credit cards has surpassed an astonishing $1 trillion. Just in the second quarter of 2023, this figure spiked by an additional $45 billion last quarter alone. However, this isn't just about the large number itself; it's also concerning because interest rates have hit a 22-year peak. To put this into perspective, according to a source called BankRate, credit card interest rates have escalated to nearly 20.53%, marking a rapid and continuous rise for five consecutive quarters.

Yet, the combination of these high interest rates and burgeoning debt balances creates a challenging financial situation for individuals. While paying off debts is essential, so is saving money for the future. As debt payments rise, a vital question emerges: "Am I saving enough?" Unfortunately, for many, the answer is in the negative. Personal savings rates have now dropped to a mere 4.3%, which is significantly lower than the 30% or higher rates observed during the pandemic. Historically, this falls well below the 10-year average of approximately 8% to 9%, which is typically considered a healthy benchmark. The savings rate is a simple calculation where it takes income after taxes are paid and all expenses are covered. The remaining money that is left over is considered the amount saved. For example; if someone brings home $50,000 after taxes and after all expenses are paid ($48,000), they have $2,000 left. This results in a savings rate of 4% ($2,000/$50,000) which would fall below the recommended average. Consequently, we must now grapple with the question: "How can I begin to save more effectively?"

The solution primarily centers around how we manage discretionary spending. As stimulus checks flowed in, consumer spending experienced a sharp increase. However, while recent data indicates that consumer spending remains robust, this might not bode well for our long-term financial well-being. Prioritizing debt reduction takes precedence over most other financial concerns. Failing to make payments on time can lead to a decline in credit scores, which, in turn, results in higher interest rates and greater financial burdens in the future. Thus, consumers are urged to shift their focus towards trimming discretionary expenses, which translates to fewer expenses on leisure activities such as concerts, sports events, and dining out.

A prudent course of action involves targeting a savings rate ranging from 8% to 9%, coupled with investing these savings in reliable investment avenues. By pursuing this approach, individuals can chart a positive trajectory for their financial future, working towards their goals with enhanced financial security.

Mohammed Reza

Account Executive

Moe started at Narwhal in the fall of 2022 as an investment intern and joined the Narwhal team in a full-time role in April of 2023 after graduating from the University of Georgia with a degree in Finance and an emphasis in Pricing and Valuation. Moe is tasked with servicing a portion of Narwhal’s client base and evaluating and doing research on investments as a member of the Investment Committee. In his free time, Moe enjoys going to Braves’ games, playing golf, hiking, and watching the Georgia Bulldogs win National Championships.

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