Personal savings rates in America rocketed higher at the start of the pandemic. The combination of government stimulus checks, the inability to go out or travel, and economic uncertainty led to savings rates climbing well into the double digits. Prior to the pandemic, Americans' savings rate was between 7% and 8%.

But Americans are struggling to save again. Savings rates have fallen below the pre-pandemic average, reaching 5.4% in May, according to data from the St. Louis Federal Reserve. There are several factors at play, some you may be able to control. If you want to keep your budget and retirement on track, your savings rate may be one of the most important factors to watch as you make your plans.

Person with hammer threatening piggy bank.

Image source: Getty Images.

Where America is spending

There are several factors impacting savings and spending. The biggest right now appears to be inflation. The personal consumption expenditure index increased 6.3% year over year in May. Stripping out fuel and food costs, the index still increased 4.7%.

With the high rates of inflation, Americans have actually cut back on gasoline and food for home consumption but still have to pay more in nominal dollars. If real wages aren't keeping up with inflation, that makes it difficult to save. The chart shows where consumer spending has increased and decreased.

Spending on housing and utilities, gasoline, healthcare, and food all increased substantially in May.

Data source: U.S. Bureau of Economic Analysis.

That said, many are spending more following the easing of restrictions after the wide vaccine rollout from 2021. Year over year, spending on both goods and services spiked last summer, lapping the period of more intense lockdowns in 2020.

Americans are also feeling the pinch of increasing housing and utility expenses and healthcare costs. Those are mostly unavoidable expenses. Both saw significant increases in spending, outpacing average inflation rates.

The importance of your savings rate

If you're lucky enough to be earning a sizable income but still struggling to save money, now's a great time to reconsider your budget and priorities. Even if you're bringing home a good salary, if you don't have any room in your budget for inflation, it can be a disaster for your personal finances.

The higher your savings rate, the easier you'll be able to absorb inflation. That's because inflation only impacts your spending. For example, if you're saving 50% of your income and inflation is 10%, you can still save 45% of your income. On the other hand, if you're only saving 7% of your income and inflation is 10%, you're now actually forced to find ways to cut back on purchases if you don't get a pay raise.

Also, consider that the retirement equation has two sides. The first is how much money you save and invest. Those are the funds you'll be counting on to fund your retirement. 

The other side is how much you spend every year. You need to save enough money to cover the cost of your lifestyle. The more you spend, the more you need to save.

But the more you spend, the less you save, by definition. Savings are what's left over after you spend. As your savings rate declines, you'll need to work longer or take greater investment risks to meet your required funding goal for retirement.

Maintaining a high savings rate is one of the best things you can do for your personal finances in both the near and long term. While inflation definitely hurts, now may be the most opportune time to analyze your personal spending habits and figure out what adds the most value to your life, as well as what you may be able to do without.