A new survey from Neighbor has found that 78% of Americans plan to cut back on spending this holiday season. This is hardly surprising since high inflation and rising interest rates drive the US economy to a recession.
As per Neighbor’s 2022 study:
- Of the 78% planning to scale back their holidays, the following expenses will be reduced:
- 42% will buy fewer presents
- 31% will travel less
- 34% will not purchase new holiday decorations
- 27% will host fewer parties or gatherings
- 20% will be making fewer charitable donations
- Everyone is working for the (holiday) season. 82% of Americans working a side hustle or picking up additional hours at work are doing so because of the rising cost of living/inflation.
- The extra money is needed post-holidays. For those that picked up extra work or started a side hustle, 92% will keep this going into 2023.
- Surprisingly, 13% of respondents indicated that they expect to spend at least $1000 more on holidays this year vs. last year, with many choosing to spend on big-ticket items like TVs and home fitness equipment.
The general impression may be that cutting back is only for people in the lower wage brackets. This is not the case. According to Business Insider, wealthy Americans are also cutting back.
Per their survey, households making more than $125,000 have already started spending less and are shopping at discount stores more than usual. This is a worrying sign for the economy, with the top 20% of earners accounting for nearly 40% of spending in America. Falling prices for luxury goods are already showing the effects.
Consumer prices are rising at the fastest rate in 40 years. The Federal Reserve implemented yet another interest rate hike in November to combat this. Termed a ‘jumbo’ hike, the benchmark rate was increased by 0.75 percentage points.
Rising interest rates aim to curb inflation by making borrowing less desirable. At the same time, rising rates increase debt costs for necessities like mortgages, car loans, and personal loans.
According to Greg McBride, chief financial analyst at Bankrate, potential homebuyers can only afford about 65% of what they could in January. He mentions that the average monthly payment for a $300,000 mortgage would be $710 more today than in January 2022. This is quickly depressing the housing market, which was on fire during the pandemic.
A study finds that 55% of Americans with credit cards carry a balance month to month. 30% have up to $5000 in credit card debt, and 15% have more than $5000. Worryingly, 6% or 14 million Americans have a balance of over $10,000 on their credit cards.
With rising rates, credit card interest rates also increase as they are tied to the Fed’s benchmark rate. Most credit cards already charge shockingly high rates, so consumers with balances will have to pay even more just to cover interest costs on their balance.
Average credit card rates are already hovering near 22%, so many Americans are likely preparing themselves by curbing spending and focusing on paying down credit card debt. This is a smart move.
If you are stuck in the credit card debt spiral, consider consolidating your debts and paying off high-interest loans with a lower-interest home equity loan or personal loan.
If anyone in your household plans to attend college and obtain a student loan, now is a terrible time to do so. Federal student loans are not tied to a variable rate, but the interest rate is up to 4.99% for the 2022-23 year, which is up more than 2% since the 2020-21 academic year.
The good news for current loan holders is that the U.S. Department of Education has suspended loan payments and stopped collections on defaulted payments till December 31, 2022.
What’s worse is that inflation is stubbornly refusing to decline. All the rate hikes have only succeeded in bringing down inflation to 8.2%, as per the consumer price index. This is nowhere near the central bank’s preferred 2% level. This means that more interest hikes are likely coming in December and 2023.
With the stock market exhibiting extreme volatility and inflation running wild, you can safeguard yourself by investing in high-interest savings accounts and fixed-income instruments. While you won’t recover all of the purchasing power lost due to inflation, you can offset some of the lost value of your cash.
One benefit of historically high-interest rates is that interest rates on savings accounts are also beginning to rise. While saving rates are still well below inflation, you can find yields as high as 3.5% on certain accounts right now, as per Bankrate.com.
Similar to savings account yields, interest paid on safe certificates of deposit (CDs) is also higher. You can find reputable banks or credit unions currently offering 1-year deposit rates from 3.5% to 4%.
Neighbor’s survey found that 68% of Americans plan to work additional hours or pursue a side hustle to combat rising prices and afford gift-giving, holiday travel, parties, and more. Besides affording additional spending, this is an excellent time to contribute extra money to an emergency fund.
With Americans already struggling with rising prices, increasing interest rates make life even more difficult. With a more significant chunk of household incomes being redirected to debt servicing, Americans are less likely to spend on discretionary items during the holidays. Prepare yourself by earning more income, budgeting carefully, and investing wisely to offset some of your worries.
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