Are You Tapping Your Pandemic Savings to Cope with Inflation?

As a father of three college girls, I know I’m supposed to be preparing them for life and all, but sometimes it’s hard when they already know everything. You know, it can be tough to realize you’re no longer cool, or to have your kids correct you regularly. A prime example, last weekend I was finishing breakfast with Phoebe and Sophie. I was relaying a story I had read recently and summarized it by saying something along the lines of, “Well, it just goes to show that sometimes you take one step forward, two steps back.”

Of course, I was immediately corrected. The correct phrase, Phoebe tells me as she rolls her eyes, is actually “Two steps forward, one step back.” Then they both sighed and left the table, chuckling. I’m sure they wonder how I got this far without them.

But seriously, I think right now many folks’ finances that truly reflect the girls’ version – they’ve taken two steps forward only to now be taking a step backwards with their savings. 

Get this, according to a Wall Street Journal article₁, from the start of the pandemic to the end of 2021, U.S. households built up $2.7 trillion in extra savings. Covid-19 lockdowns seemed to keep more people at home with few places to spend money, and three rounds of stimulus payments helped to boost their incomes.

For many, stimulus checks helped cover major expenses during COVID and was enough of a buffer to make their financial life easier month to month. For example, the child tax credit gave families up to $300 per child each month in the second half of 2021, although that ended last December. 

And Americans’ checking-account balances jumped after they got their pandemic stimulus payments, bank executives have said. While customers have spent some of that money, balances still remain mostly above where they were in 2019, said Chris Wheat, co-president of the JPMorgan Chase Institute, the bank’s in-house think tank. At the end of March, balances of families with the lowest incomes were 65% above 2019 levels. But they used to be higher. In March 2021, around the time of the third round of federal stimulus checks, balances for those families were up 126% from 2019 levels₂.

But today, we’re seeing families having to draw on their savings, which includes money from the child tax credit as well as pre-pandemic savings, to combat higher prices. According to the Bureau of Economic Analysis, many households have a cash cushion to navigate through high inflation but these families have tapped about $114 billion of their pandemic savings so far₃. They’re turning to their savings to help manage higher costs on gas, food, healthcare and more, especially because wage gains are not keeping up.  Folks, this is not good.

For many, they’re having to “tighten the belt” these days to pay their bills without depleting their savings. One bright spot, though – the bottom 20% of earners was the only income group that didn’t draw on their pandemic savings in the first quarter of the year. These are often folks working in fields like leisure, hospitality, retail, healthcare. Strong wage growth has allowed many of these workers to continue to save₄.

If you find yourself in the position of having to draw on your hard-earned savings to make ends meet, don’t despair. First, know that you’re not alone. And if that doesn’t make you feel better, take action. You have options to help manage your finances to try and reduce the drain from your savings. Now is the perfect time to revisit your budget (or make one, if you don’t already have one). You’ll want to update the amount you allocate to items affected by inflation, such as gas and groceries. Once you have a clearer understanding of where your money is really going, you can decide where to make cuts. For example, you might decide to forego the premium cable channels for a while. Or maybe you find a buddy to carpool with to work to split the cost of gas.

Be sure to review your investments, too. You need a strong retirement system now more than ever so you can take advantage of investment opportunities that present themselves during periods of high inflation. One that utilizes strategic and tactical investing concepts to ensure you keep the proper allocation between cash and growth-oriented investments. Because at the end of the day, as long as you’re taking two steps forward and just one step back, you can still come out ahead.

So as always – be vigilant and stay alert, because you deserve more!

Have a great week.

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, and Mansfield, MA. Insurance offered through its affiliate, CutterInsure, Inc. 

We do not offer tax or legal advice. Jeff can be reached at jeff@cutterfinancialgroup.com. This information is intended to provide general information. It is not intended to offer or deliver investment advice in any way. Information regarding investment services is provided solely to gain a better understanding of the subject of the article. Different types of investments involve varying degrees of risk, including the potential for loss. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. Insurance product guarantees are backed by the financial strength and claims-paying ability of the issuing company. Market data and other cited or linked-to content is based on generally available information and is believed to be reliable. Cutter Financial does not guarantee the performance of any investment or the accuracy of the information contained in this article. Cutter Financial will provide all prospective clients with a copy of Cutter Financial’s Form ADV 2A, Appendix 1, applicable Form ADV 2Bs and Form CRS as well as the firm privacy policy. Please contact us to request a free copy via .pdf or hardcopy. 1. https://tinyurl.com/u3kpk2z2  2.https://tinyurl.com/ycktyr4j  3. https://tinyurl.com/5n8uw83h 4. https://tinyurl.com/u3kpk2z2