Wednesday, January 27, 2010

The Recessions' "Silver Lining"

Our nation’s current economic state has been like a dark cloud over both consumers and businesses for well over a year. While words like ‘foreclosure’, ‘bankruptcy’, and ‘bailout’ have been added to our day-to-day vocabulary, it is hard to imagine a silver lining to this dark cloud of recession.

However, behavioral economists – the people that study the way human beings make money decisions – are noticing a positive and promising trend in one way Americans have responded to the recession. In the last year, when unemployment rates skyrocketed, along with rising foreclosures, bankruptcies, and bank failures, a surprising thing occurred – Americans, on average, saved more money.

The savings rate of Americans grew in 2009 for the first time in decades. Recent data released by the US Department of Commerce’s Bureau of Economic Analysis shows the savings rate rose to nearly 7% in the last quarter of 2009. This is the highest rate since the early 1990s and is predicted to grow to nearly 10% in the next one to two years.

So, what is behind this seemingly counter-intuitive phenomenon? Conventional wisdom would tell us that during these dire times of job loss and loan defaults, our rates of personal savings would decline as we struggle to make ends meet. While nearly all households have felt some type of fiscal crunch, stashing cash in savings still became a priority.

When we feel financially secure and the economic climate seems healthy, we tend to put our money into ‘better’ uses like home renovations or family vacations. But, when the economic turmoil began to make news and the unemployment rate started to leap, so did our savings rates.
Suddenly-insecure Americans decided saving money in emergency reserves is a better use of our hard-earned and increasingly scarce funds, since the future seemed a bit more uncertain.

Unfortunately, for the many individuals and families that scrambled to build emergency savings accounts over the past several months, saving money may be an all-too-easily-forgotten practice once the fear of the recession subsides.

We will all be much better off if this crash-course lesson in saving money isn’t abandoned at the next sign of economic recovery. The silver lining of this economic cloud will shine brightly if some of these belt-tightening techniques become long-term behaviors.

We’ve learned now that we can trim our budgets and delay some purchases when our future is uncertain and increased security is needed. Let’s continue the trend of making personal savings a priority, so the next time a dark economic cloud appears on the horizon, we’re prepared.

No comments: