COVID-19 has done what personal finance gurus thought impossible: gotten Americans to save money. For the first time, some Americans are saving a third or more of their income.
According to the U.S. Bureau of Economic Analysis, the personal savings rate jumped to 33% in April, a historic high. Americans are saving money by driving less, eating at home more, and spending less on discretionary purchases. The trend is especially strong among high earners who’ve maintained their income while also reducing spending.
How these super-savers manage their cash reserves has huge implications for the nation’s financial sector. Here’s what financial services companies should expect:
Non-Traditional Banking Is Now the Norm
These days, Americans aren’t keeping their savings in brick-and-mortar banks. The pandemic makes setting foot in a traditional bank a risky proposition, and these banks’ overhead costs mean lower rates for savers.
For their convenience, safety, and higher yields, Americans are embracing digital banks. They’re using online debit cards with round-up features and fewer fees to boost their savings. Even as the crisis recedes, they’re unlikely to switch back to a bank with higher fees.
What does that mean for traditional banks? Local branches may be shuttered in an effort to reduce costs. Those that can afford to raise interest rates on checking and savings accounts will in order to compete with online banks.
Financial Advisors Are Busier Than Ever
Americans who are saving more are wondering what to do with their extra cash. Especially with the Federal Reserve signaling it’ll support higher inflation rates, they’re concerned about losing their gains to rising prices. Keeping cash in a checking or savings account with a 0.1% yield simply doesn’t make sense when inflation is at 2%.
Many Americans are also worried about what’s still to come economically this year, especially if their ability to save doesn’t last. Financial advisors will need to be prepared to calm clients’ fears. Others, however, will need to tamp down excessive optimism: Equity values may be rising, but systemic risks remain a concern.
Expect both traditional and online banks to lean heavily into their financial advising services. Some advisors are guiding their clients to convert some of their savings into equities, real estate, or precious metals.
Investing Is Back in Vogue
After an initial drop in equities markets, they’re now hitting all-time highs as investors pump money into stocks and bonds. Americans are using their extra savings to catch up on their retirement and non-retirement goals. Although it’s never a bad idea to invest for the future, market volatility means nothing is a sure bet.
Another reason investments are rising is that many people have found themselves with more free time on their hands. With events cancelled and many out of work, some Americans are dabbling in day trading for the first time through apps like Robinhood. Popular tech stocks, such as Tesla, are likely to benefit from these investors’ behavior.
Investing services, including both apps and traditional brokerages, are likely to grow. Asset values will continue to rise with them. For these financial services firms, sustainable growth is the smartest way forward.
Life Insurance Is Falling Out of Fashion
As more Americans build nest eggs, expect fewer of them to invest in life insurance. People who are confident they’ll be able to leave an inheritance to their next of kin don’t feel the same pressure to purchase insurance policies.
Financial services firms will need to remind their clients that insurance is an important part of life. End-of-life costs can easily wipe out years of savings. Other insurances, such as long-term disability insurance, can guard against unexpected events that may be difficult to save adequately for.
While fewer Americans may be purchasing life insurance, they’re likely to spend more on other types of insurance. During the pandemic, the need for health insurance is clearer than ever. And those who’ve maintained their employment may use their savings to make larger purchases, like cars or homes, which require insurance.
Real Estate Is Booming
Through the combination of low mortgage rates and high savings, many Americans are thinking about buying a home. Those who were planning on buying a house in the next couple of years may decide they’re unlikely to see such favorable conditions again soon. And as home prices rise, they’re increasingly likely to see it as a smart investment.
Those wanting to sell their house may also find the current real estate market to be favorable. In many areas, housing markets are tight, so sellers have better luck simply due to a lack of options.
Whether your company is on the buying or selling side of the real estate market, expect transaction volumes to grow. And unless current market conditions change significantly, plan for prices to remain high and inventory low.
Commodities Are a Wild Card
Historically, Americans have sunk their savings into commodities as a hedge against inflation and market swings. After all, people need goods like toilet paper and gasoline whatever happens with the market.
But during COVID-19, that traditional wisdom may not hold. The pandemic has rattled commodities markets by upending supply chains and causing Americans to reconsider what they truly need. Some industries, such as agriculture, have already been battered by tariffs, calling into question whether they’ll ever return to pre-pandemic levels.
Financial advisors must be cautious when recommending clients invest in commodities. Not all staples have fared equally during the pandemic, and the turmoil may continue for years.
The pandemic is shaping how Americans spend and save their money in ways that are difficult to predict. Who would have thought, for instance, that the stock market would hit a record high in the middle of the crisis?
Both financial services companies and savers themselves are in uncharted territory. Banks, brokerages, and tech-based financial services need to keep a close eye on the economy’s shifting trends. Americans won’t sit on their savings forever — the question is, where will they finally decide to sink the funds they’ve been socking away?