Why Are We Still Saving So Much?
For years now central banks around the world have held interest rates at record lows with a couple of main objectives. Firstly, they wanted to relieve the debt burden on overly indebted individuals, to prevent an all-out housing collapse and depression on the scale of that seen in the Great Depression. The second objective of holding interest rates so low is to encourage people to spend more by putting more money into the pockets of the average consumer and also to make it less worthwhile stashing your cash away in savings accounts due to the low rates of interest being paid. While the first objective of preventing an all-out collapse has so far been achieved, a report from the BBC today showed that savers have been undeterred in their efforts and that UK savers actually saved over 5% more in the last financial year than they did in the year previous, even though inflation and taxes combined have effectively led to a negative return on deposits for most. So why are people still saving so much of their money?
Although central bank policies have managed to put more money into the pockets of many in the population, a large number of people have not forgotten the financial cliff we almost fell off – and have also been teetering on the edge of – since early 2008. Rising energy costs, rising food bills, job insecurity and changes to benefit and pension entitlements have all made people nervous to go out and spend the money they have sat in the bank and some are going even further by adding to their savings pot.
Another reason why people aren’t spending the extra money they have in their pockets due to low interest rates is that instead they’re wisely using that money to pay down the balances on their existing loans, credit cards and mortgages. Back in 2007 the sub-prime mortgage market was booming, why? It was booming because so many people were severely struggling with debt. Many of those people were staring financial ruin in the face and couldn’t see any way out of their dire position. Then in 2008 these borrowers were thrown a truly unexpected lifeline when the central bank dropped UK interest rates to 0.5% and rates went even lower in the US. Suddenly many of those who were borrowing on credit cards each and every month just to cover their day to day living costs, found themselves with money to spare at the end of the month instead, a lot of money in some cases. What would they now do with this extra cash?
Well, after a couple of months of treating themselves to family days and meals out, many started to take a look at how they could use that money more wisely. From that point on many families have commendably been paying off the debts that landed them in such a precarious position in the first place, taking advantage before interest rates start to rise again.
The Crisis isn’t over yet
It also seems that every time people do start to feel a little more confident in the state of the local and world economy, another crisis or piece of bad economic news comes along, causing them to remove their cash card from the ATM once again. We recently had the crisis in Cyprus which showed how the financial position for many can change overnight, this time to hinder and not to help them. Why only today we’ve had news of possible funding problems over at the Co-operative Bank causing them to halt lending to new businesses. Until we stop hearing stories of this kind, people will continue to stash their money in the bank, and we have no way of knowing how many are stashing it under a mattress.
Economic prosperity doesn’t just rely on people having the money available to spend, they also have to have the confidence to spend it. Until we are allowed to forget the memory of the economic crisis of recent years, people will continue to save their money for a rainy day and better their financial position. Though this mentality might not give an instant boost to economic growth, it’s still the wise course of action for many and in some ways it’s also nice to see financial sense prevailing once again.
Are you feeling more confident in the economic situation or are you still cautious to spend? Please leave a comment below.