As we head/continue into the US recession in 2008, its practical to remember the spend-thrift ant and the thrifty grasshopper. These periods are usually fantastic for those who have saved and thus have cash. On the other side of the coin, its terrible for those who have no cash or, worse, debt. If you are like most American’s, you probably were like the grasshopper (and this isn’t the “wise” kind).
I am considered financially savvy by many friends (it’s all relative, no?). So they ask me for friendly guidance on how much they should save. I always advise that maintain a lifestyle where they can save/invest a third of their income. They money can go toward any investment — stocks, education, house. They say I’m crazy.
Well then Europe is crazy. National savings rates in Europe run around 20%.
Japan is crazy. They save about 25%.
The craziest is China. The savings rate in China has gone from almost 20 percent of GDP in 1981 to 30 percent in 1988, and currently stands at about 40 percent.
Meanwhile, the average savings rate for the US is calculated between positive/negative .4%. Yes, that is less than 1%.
It’s all relative, no? And American consumerism is spreading. Savings rates are dropping in Japan and Europe. We are infectious.
This post isn’t to say that the low savings rate is a bad idea. Savings are not an engine to produce wealth — investment in innovation is. So maybe the money is being sent on innovation-based initiatives like R&D and education?
Maybe not. We are too preoccupied with owning a home — Americans have one of the highest home ownership in the world at 57%. That’s saving in the hopes that our population grows (it’s not unless you count immigration) and land value increases ( its not now thanks to the real estate bubble of 2007). Maybe we should have saved up for that boring education, huh?
I understand the drive to spend. I’m not immune to the the consumerist society. Like others, I’m taking “extra stuff” to charity yearly. When looking for a house, I asked myself where I would put “my stuff”.
But I understand my drive to spend and I combat it when possible. For example, recently after saving for a house I selected a house with the least amount of closet space — there is nary a walk-in closet (do you really need 20 pairs of shoes!). I take a shopping bag to the groceries and limit myself to buying only that which will fit into it. I avoid impulse buys by putting off large purchases at least 4 weeks, and after I’ve saved for it. I pay everything by credit card so I can track and monitor my spending monthly.
I enjoy “ownership” just like the next guy, but not by buying a house with 5% down, interest-only loan. That’s not a sign of educated spending. Rather, that’s a sign of a very different mindset on debt. I think much of that derives from our fear of discussing “financial matters” with friends. A recent article in Newsweek said it succinctly.
We discuss our sex lives more than our bills. How often do the words “frugal” or “thrifty” come up in conversation, especially as a compliment? The words have a distant ring of the 1930’s to them. Maybe it’s time we bring them back.
Bring them back indeed.
I truly worry about my friends and their spending habits. And I encourage them to call me out on them (thanks honey for being on me about my gadget-lust — you’ve helped keep that iPhone away from me for nearly a year now…grrrr).
Remember, like a diet, it’s the small things that count and add up. Skipping on that cookie once a week may not seem like much, but after a year you’ve saved yourself nearly 3 lbs in extra calories. Let’s apply those same parsimonious principles to savings.
Next time you see a friend spending like a sailor, speak up.