I’ve been reading a lot about all the possible gloom and doom that can be realized when the majority of citizens start saving more. While no one disagrees that saving is good, we’re starting to hear from more and more "experts" that saving is really best done during economic boom times. It turns out that saving during an economic downturn only makes things worse. Unfortunately, we are all individuals and make individual decisions about when we want to save. That doesn’t help the broader economy. While our family has been saving all along, we’ve actually increased our savings rate now for the same reasons many others have. The more money we have in the bank, the more secure we feel.
What really has the experts in a tizzy is that most of the saving that is happening now is due to reduced spending. In other words, people aren’t making more money and then saving some of it, rather, they are making less money and spending even less. The end result is that we are continuing to see things get worse. Unemployment is increasing, foreclosures are increasing (and I bet they take a nice big jump once the banks quit holding back), and the stock market keeps seeing negative numbers.
So, why won’t people just start spending like crazy to help our consumer driven economy? It doesn’t make sense to. On an individual basis, why wouldn’t I hold on to more of my money to increase my security? Even if I’m not fearing a job loss, right now it makes sense to hold off on purchases to wait for prices to decline further (deflation). While that doesn’t help the greater good, it’s a better financial decision for the individual.
Yet another reason to save is to take advantage of buying opportunities in the market. Eventually the market is going to stop hemorrhaging and it will begin recovering. This may go fast, but more than likely it will be a much more gradual recovery. The more money you have in cash, the more you can take advantage of historically low stock prices. I’m keeping my eye on a Berkshire Hathaway Class A share. I’ve always wanted one and Berkshire hasn’t been immune to the massive share price reductions. If it comes down further, it may reach my affordability range. Of course, the more money I save, the closer I am to being able to afford it, or other investments like it. The point is that it takes money to make money. If you can manage to accrue enough in your savings accounts now, you just might have the opportunity of a lifetime. Of course, this strategy is much more relevant to people in their 20’s and 30’s than it is to people who are getting close to retirement. Finally, time will be on our (the younger generations) side in a way it never has been before. I’d much rather buy in to a cheap market and then have 20+ years for growth, than I would buy in to a bloated market and then have 20 years to realize substandard returns, or even losses.
Bottom line is that cash is king in this environment and the more you save, the more you’ll reap the benefits as things level off and start to improve. People in the great depression probably never thought they’d see a light at the end of the tunnel. The reality is that eventually, things will improve. If you have 20+ years on your side, you are going to be in the drivers seat for huge potential gains.
I save both in good times and bad. I’m not spending right now because there is nothing I really want to buy except for the basics. It is silly drivel for the government to encourage spending. Spending will grow naturally as people need things. Just because many have been high on the spending drug doesn’t mean the rest of us have to join in. If you want to save, go ahead, the money gets spent eventually.
Saving? Sure, if possible. Economizing is just as important, imho. I think each of us has the responsibility to get the most for our money. It may not immediately “help” the economy but rampant consumerism is one of the things that got us all into this mess in the first place.
For example, my daughter HAS to have a phone, No negotiation there, and I got tired of fighting with her over the high bills.
But I discovered that you can get out of your expensive cellphone contract if the company changes its terms.
When Sprint changed its charges for texting, I called them and was able to cancel the contract!
They won’t tell you, of course. You have to ask!
I turned around and got a pay in advance phone from Net10 and only pay what I can afford up-front and it’s now a part of my daughter’s “allowance” which has turned out to be a very good way to get her into the habit of budgeting.
It may not be a “necessity” to everyone but any way to reduce costs is good to me!
I can’t recall if I’ve posted a comment before. In case I haven’t, I want to say that I really enjoy your blog. Also, I want to make sure you are aware that Berkshire offers two types of shares — the Class A shares, which are the original and trade around $100,000 per share, and a Class B that was introduced later. The Class B does not have voting rights, and it is worth 1/30th of the Class A. As far as I’m aware, they are otherwise they are the same.
With Berkshire down near 15 times earnings, I have thought about buying some Class B shares. But I still have some hesitation because I don’t have faith anyone can replicate Buffet’s success.
Korey,
Thanks for the comment. I’ll have to do some more research on the Berkshire Class B shares. I didn’t realize that was the case on those. I don’t think I really need to worry about voting rights with the number of shares I’d have so Class B is probably the way to go.
Also just FYI Warren’s annual shareholder letter was posted to the Berkshire website this weekend. Even if you don’t own any stock, it’s always worth the read.
Not having a contract cellphone is a no-brainer to me… once I thought about it.
I have Straight Talk on the Verizon network. Bought it at Walmart and it’s an amazing deal. The Samsung Finesse is a very cool smartphone and paying only $45 a month for unlimited everything is the best deal going!
Who needs an iPhone? LOL!!