Looking at pandemic-related savings trends

We're better at managing our savings thanks to technology, and more of us are saving because of the pandemic. When will we emerge and start spending again?
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We’re at the cusp of a post-pandemic spending spree. By cusp, I mean anytime within the next year, or maybe two. Who actually knows?! Yet, there’s a pattern to these sorts of things, when the world suffers through health scares, financial crises or general misadventure and the populace responds by planning a party in the years that follow. It may happen now too because people are saving more money than they usually do. There may be a surplus of funds poised to be spent in the not-too-distant future. And the economy needs this to happen.

As specialists in financial technology solutions, we are advocates of saving. We create digital environments that encourage this, and help many financial institutions realise their digital ambitions by helping their customers manage their finances better. We keep a close eye on trends in saving because it’s important to track behaviours and mood swings that will determine the best customer experience. Right now, we’re seeing mixed messages, so let’s take a look at some of these.

High earners are spending less

In the UK, it’s rare that the savings rate (how much people save as a percentage of their disposable income) peeks above the 10% bar. Astonishingly, our savings ratio increased to 29% between April and June 2020. That’s a record-beater, and a recent figure says an enormous £100bn has been built up by UK households during the pandemic, which is a lot to put under your bed.

As well as seeing more people save, spending decreased in areas such as entertainment, eating out, new clothes and travel. And there was more money to go around for a select few, with refunds from cancelled holidays, stimulus payments and tax refunds adding to the stash of cash that could be put away for a rainy day.

Yet, it’s high earners who are spending less. This means many lower-paid people in low-salary jobs are not getting their usual income. Why? Because these jobs are often retail, hospitality, travel and leisure – all the things Covid-19 put the brakes on at the beginning of 2020. And remote working helped too because we’re not spending as much on our regular commute, our pricey lunches and Pret coffee. We’ve built over time an economic environment that plays into the hands of sudden jolts to the system.

“Such a large part of our economy, and of employment, has been embedded in servicing high-income people, as opposed to making things and manufacturing,” said Harvard economist Lawrence Katz in a recent Atlantic article.

Shifting spending behaviours

And while it’s good to save, there will come a point (if we haven’t already passed it) where we will need to spend our pennies to rescue the economy. However, what will we spend all of this money on? Will it be the traditional outlets of holidays, restaurants and trips to the cinema, or have our buying behaviours altered as a result of the pandemic? Will takeaways flourish while traditional restaurants close their doors forever?

Our behaviour has changed in how we save as well as how much, with savings goals very much a vital part of our personal finances. Interest rates are rock bottom – you don’t get much for each pound these days – so people have turned to investing much more freely thanks to the advent of digital startups that help people manage their savings better. The rates are much more attractive, especially in fixed plans. But while it’s easier than ever to invest your money, and Finder statistics show the number of adult ISAs in the UK has increased over the last few years, the amount we put in the ISA has fallen.

Bucking this trend are young people, who opened a huge number of Junior ISAs in the UK (before the pandemic hit) and on average invest more of their savings than adults do. And investing is good, as Megan Greene of Harvard Business School points out: “As long as the money is put in savings instead of being invested, then typically that tends to weigh on interest rates, it tends to curb growth and to weaken the potential of the economy.”

Much of this behaviour may relate to generational differences in how we establish our savings goals. Young people may have less to put in, but they’re setting their savings goals high to pay for a better car than mum’s old one. Of course, it could simply be that they’ve witnessed first-hand some of the financial hardship their parents suffered through thanks to recession, and they’re starting early on their journey through financial life. And as they are digital-natives, fintech is set up with their needs in mind.

Getting through it

We know enough about human behaviour to understand that it’s rational to save during a crisis. However, if everybody does it, we will make things worse. If many of us are feeling the pinch now, wait until the recession becomes really bad and stretches its unwelcome legs right into 2022-23.

It isn’t all doom and gloom, because while structural changes to consumer habits may be happening right under our nose, our cash-hoarding will inevitably end. With different generations using savings goals for different purposes, we’re seeing financial services adapt to their different needs in terms of investment opportunities. It’s easier than ever to navigate our financial status with great digital apps and online services, and we are particularly competitive in the UK as regards who people turn to for banking and savings advice. In the end, helping more people adapt to managing their finances to get through Covid-19 is the best financial advice banks can provide.

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