This year is breaking America's short-lived savings habit

Many people cleaned up their financial lives during the pandemic, but those good habits are slipping in 2022.

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Many Americans improved their financial habits during the pandemic by cutting expenses and paying down debt, but those habits are slipping in 2022, according to research from Northwestern Mutual

The 2022 Planning and Progress Study, conducted in February by The Harris Poll on behalf of Northwestern Mutual, surveyed 2,381 adults. Over half — 60% of respondents — said the pandemic was highly disruptive to the way they manage their finances, but many have been able to adapt. A majority (60%) said they’ve built up their personal savings over the past two years.

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That buildup may be short-lived. The average amount of personal savings fell 15% year over year, from $73,000 in 2021 to $62,000 in 2022. In 2021, many said they reduced living costs/spending (45%), paid down debt (34%), and increased investing (33%), but the percentage of people reporting these habits dropped in 2022.

Worries about their health and the state of the world may have led people to adopt more rigorous savings habits in the early part of the pandemic, says Christian Mitchell, chief customer officer for Northwestern Mutual. “They frankly had fewer things to spend money on, which helped improve their financial picture,” he says.

The pandemic also gave people time to reassess their financial habits.

“They were sitting at home and they took the tough moment to clean out their cluttered financial basement and get things in order,” he says.

Why are people saving less money now?

As the pandemic drags into its third year, some Americans are taking a more carefree attitude toward their finances. Economic conditions are also making it difficult to save, with inflation forcing people to spend more.

“For a group of people, you’re actually likely to see pretty major degradation around the discipline they see around their financial picture,” Mitchell says.

How do people feel about their future finances?

The survey found people feeling pessimistic about the economy. Only 43% said the U.S. economy is strong, and just 35% expect inflation to subside in 2022. Over the next year, Mitchell expects those numbers will grow.

But despite these worries, people feel confident in their personal ability to manage their finances. Two thirds — 66% — said they have or will achieve long-term financial security, and 60% expect to have enough to retire. Mitchell says surviving the pandemic has made people optimistic, though the deteriorating economy may show their confidence is misplaced, but “I think we all surprised ourselves through COVID with our resilience, our adaptability,” he says.

The biggest factor going forward will be inflation. The Federal Reserve’s success in controlling prices while trying to avoid a recession will loom large over next year’s survey, especially since many people today have never lived through a similar period of high inflation.

How to improve your financial habits

The survey shows how complex managing money has become. In just two years, America has experienced a pandemic and runaway inflation. 

“I don’t think any consumer is well positioned to be able to navigate all those possible future scenarios, so the strong piece of advice I give people is to work with a financial advisor,” Mitchell says. He acknowledges that this might be seen as self-serving, since Northwestern Mutual provides financial advice, but he says people have plenty of options. For example, you can find a financial advisor using services like the XY Planning Network or the Garrett Planning Network.

You can also take a few steps on your own to set yourself up for success.

1. Set goals 

“If you have no target you cannot make measurable progress,” says Kirsten C. Cadden, a certified financial planner with Warren Street Wealth Advisors. Your goals should include specific amounts, like “retire by 65 with enough saved to spend 80% of your current income every year.” They should also include a “why.” “If someone writes down their financial goals and they don’t sound exciting or fulfilling or meaningful in some way,” Cadden says, “they should definitely go deeper and ask, ‘Why did I write this as a goal? Is this what I really want?’” 

2. Automate your savings

Set up an automatic transfer into your savings and investment accounts that takes place every  month, or every paycheck. 

3. Put savings and investing first

Treat savings and investing as a fixed expense in your budget, Cadden says. “Rather than budgeting for all the bills and expenses and then seeing what is left for savings, treat saving like a bill you owe yourself and pay it first.” 

4. Start where you can

“The goal may be to put 15% or 20% in your 401(k), but if all you can feasibly do right now is 2% or 3% then start there,” Cadden says. Without at least starting these habits, it can be easy to push off saving and investing, especially when times get tough. “Small progress is better than waiting for perfection. Wherever you can start is the right place to start.”

Image: Adrienne Bresnahan / Getty Images