Economists say some people may be letting good times in the stock market go to their head, and their wallet.
U.S. savings rates have recently dropped to a 12-year low, as Americans make record withdrawals from their investment and 401(k) accounts.
Where is the money going? It’s being used to pay for everything from kitchen renovations to exotic vacations.
It’s good to give yourself a little reward when things are going well, but try not to overdo it.
“It is natural for people to spend a bit of their rising lifetime savings when asset values are increasing. Economists call that a “wealth effect,” writes Harriet Torry for The Wall Street Journal.
Recent tax cuts and a strong job market are also behind the nationwide spending spree.
At the same time, overdoing the spending can undermine your long-term financial welfare and put you in danger when good times come to an end.
The savings rate hasn’t dropped this low since 2005, just before the housing crash, “when many Americans were drawing on rising equity in their homes to spend on vacations, new cars, appliances and more,” notes Torry. That’s got more than a few people nervous (including me, some days!).
The Takeaway: You’ll stay on track if you meet your annual savings targets (for most people, that means continuing to save 10 to 20% of income each year) and don’t exceed the 4% portfolio withdrawal rate used by financial planners as a convenient rule of thumb.