Inflation takes a bite out of savings

"My beautiful pile of cash is slipping away," lamented a recent caller to my podcast. She is not alone.

The personal savings rate, which is the amount of money people have after spending and taxes, dipped to 3.4% at the end of last year. That's a far cry from the COVID record high rate of 34% in April 2020 (as it turns out, it's very hard to spend a lot of money on paper towels, disinfectant and masks), and well below the pre-pandemic level of 8.8% for all of 2019.

The pandemic's impact on the economy, combined with the government's relief measures to combat it, has distorted the nation's savings rate over the past three-plus years. It started with a much larger than anticipated pile-up of cash, due to lockdowns and stimulus checks flowing, which resulted in extra savings of $2.7 trillion by the end of 2021, according to Moody's Analytics.

But last year, as inflation breached 40-year highs, consumers confronted a protracted surge in gas and grocery prices and for services like those performed by barbers, plumbers and lawyers. Many ate into their precious savings - and when those savings were gone, some turned to debt to make ends meet.

The Federal Reserve Bank of New York reported that credit card balances increased $61 billion in the fourth quarter, and totaled $130 billion in credit debt for all of 2022. Those were the largest increases for either a quarter or a year in the history of the data, which goes back to 1999.

Do those higher debt levels mean that Americans are on the verge of cascading into a pernicious debt spiral?

Economists are hopeful that we are not there yet, because the labor market remains strong enough for people to keep making their payments. That said, the data are flashing some warning signs.

In its blog, the NY Fed pointed out that "there were 18.3 million borrowers behind on a credit card at the end of 2022 compared to 15.8 million at the end of 2019." While they don't see widespread defaults, for those individuals struggling to make those increasingly costly payments, "this financial distress is real."

Whether you are digging out of debt or trying to replenish your savings to gather six to 12 months of living expenses, there is no better time than the present to track just how much your spending has increased due to rising prices, post-pandemic splurges or some combination of both.

There are lots of apps that will allow you to track your cash flow. Or feel free to go old school and fire up a spread sheet to see where your money is going. (If you are carrying Federal student loans, don't forget to factor in those payments for the second half of the year. If the Supreme Court rules that forgiveness can proceed, you will have extra dough. But if they knock it down, you will be prepared.)

If you are paying down debt, establish automatic payments, even for a small amount, and prioritize the highest interest accounts and work your way down.

If you are consumer debt free, try to focus on saving by establishing automatic transfers from your checking account into a savings account, money market account, a short-term CD. (Check out web aggregation sites like Bankrate.com or DepositAccounts.com for the highest yielding accounts.)

Once you have the emergency fund established, redirect what was going into savings and concentrate on retirement, either by increasing what you are contributing through work, or by opening a Roth or Traditional IRA account.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.