Hey Young Money,
I’ve seen TV commercials telling me it’s patriotic to spend more money. Should I? Is that true? Other places I hear to save money. Which is right?
– Good Guy
The old adage is that we, as American consumers, should try to save 5 to 10 percent of our gross income. That savings rate ensures we’re living within our means and not falling into the debt trap. However, during our most recent recession the national savings rate skyrocketed. It was widely reported that Americans were saving twice as much as they did prior to the recession, mainly due to fear of the unknown. Consumers wondered what would happen if they lost their job, had their salaries cut, or faced an unexpected emergency. They decided it was in their best interest to cut back on spending and save more; a rational solution to a difficult problem.
But why is increased savings considered a bad thing? Shouldn’t it be the other way around? Keep in mind that when consumers are saving, they’re not spending. That means manufacturers need to make fewer products, which means fewer line workers and store employees. Less manufacturing also means less inventory so warehouses are forced to close and further layoffs result. This only makes consumers more concerned, and the cycle continues.
The TV commercials mentioned in this question are meant to encourage consumers to get off the sidelines and start spending as a way to jumpstart the economy. If the savings rate came back down to normal, then all the excess money would be flooded back into the economy. This would mean more products are bought, so more will be manufactured, and jobs will be created. However, if the savings rate drops and consumers start spending rather than saving, then what happens if another recession strikes? Consumers will find themselves in the same position once again, facing credit card debt and possible home foreclosure. The bottom line is that each of us should review our own family’s resources and goals and decide what makes the most sense for us. Don’t spend simply because it’s “patriotic” because that means less money in your bank account and significant consequences next time the economy hits another low point.
Matthew Brandeburg, CFP® is the author of the book Financial Planning For Your First Job, available at www.amazon.com. His book teaches young adults how to manage their money and take charge of their financial lives. He has seven years of financial planning experience and runs his own business, Bridgeway Financial Group, LLC, based in Columbus, Ohio.