Trend of Falling Savings and Increasing Stock Investing

Americans are feeling confident financially. According to information recently released by the U.S. Dept. of Commerce, Americans are saving at the lowest pace in about a decade. The savings rate fell to 3.1%, the weakest since 2007.

At first glance, that might seem like bad news. Truth is, it might be an indication that consumers are more confident about the economy and more willing to risk their savings in the market. The stock market has reached new highs this year in part due to Americans increasing their investments into stocks and stock funds.

However, Dan Thompson, a financial advisor and author of The Banking Effect, Acquiring wealth through your own Private Banking System in an interview urged caution against investing too heavily in the market.

“Investors forget [about market risks] quickly when things are going well,” Thompson says. This year, the Dow hit 22,000 for the first time. “I’d venture to guess that 2008 is all but a distant memory for those of us who went through it. Up and down cycles tend to repeat about every 10 years or so. We’ve certainly had our ups since 2008 and the question is, is the hammer about to fall?”

What savers should be focused on is building balance in their portfolios. Taking on too much risk isn’t wise, but taking on too little risk can be just as dangerous.

“There is a saying that goes something like this, ‘the market has an uncanny way of proving the most people wrong.’ Following the crowd very seldom brings favorable results. It might be a good time to hoard some cash and get ready to buy another day - when companies go on sale.”

Who knows too, how this trend in lower savings rate might impact deposit rates. With money flowing into stocks and bonds that means there is likely outflow from bank accounts, and that should be reducing deposit levels at banks which should put pressure on them to raise deposit rates.

First thing’s first

Similarly, Erika Jensen, president of Respire Wealth Management has concerns about the low savings rate.

“I highly encourage my clients to have enough savings to cover at least their deductibles on home or renters' insurance, car insurance, health insurance, and enough to cover at least one large uninsured home repair,” Jensen says. “When it rains it pours.”

She also suggests clients consider their profession and be honest with themselves about whether or not they're happy and feel secure in their workplace. What matters too, is their ability to move quickly into another job. Someone in a high demand profession, such as a healthcare provider, may not have as much trouble as someone in an industry that is more cyclical.

Despite the fact that the unemployment rate is at it lowest point a decade, it’s still smart to be prepared for the worst.

“For people who feel like they need some padding in case of job loss I'd definitely recommend saving beyond the deductibles and one large expense,” she adds. “Once they've done that they'll find they're less involved in the debt yo-yo because they'll have cash to cover major expenses.”

Pay down debts and keep some liquidity

If there's money you could need at any moment, maybe tomorrow or maybe in two years, then that money should be in cash or a short-term CD. It may not be earning anything, but because it’s only needed for short-term expenses, you don’t have to worry about whether or not it will lose value as time goes on.

“If everything a person has saved is in the stock market, that's a bad idea,” says Jensen.

By keeping sufficient funds in liquid or semi-liquid assets, you also avoid having to tap into your long-term investments to cover short-term needs or emergencies. For example, if you have to dip into your 401(k), you’re not only missing out on returns in the market but you’re also facing stiff early withdrawal penalties and a possible tax hit on top of that. You don't want to have to liquidate stocks to pay to replace an aged roof when the stocks are down significantly.

It’s also important to focus on paying off high-interest debts before you even think about pumping money into the market. If you find yourself without savings but you are paying high interest rates on debt, that is negative interest earned.

Says Jensen: “Think about it like this, paying 21% interest on credit card debt is a guaranteed negative 21% earned, whereas stock market returns vary greatly year by year. Assume an annualized return of 7.2% in stocks. It seems to me that paying off and preventing debt is a no-brainer when you compare the two. Would you rather be debt free because you saved adequately? I would!”

How to strike the right balance

A good rule of thumb is to take your age and subtract it from 100 (or 110, if you’re more tolerant of risk). That number is how much of your assets should be held in the market. The remainder is how much you should keep in low-risk, low-yield places like bonds, CDs, or savings accounts.

Of course, this is just a basic way to determine how to stash your money.

There are some cool quizzes you can take online that will recommend asset allocation for your needs and risk tolerance, like this one from Vanguard.