Last Friday, the government released statistics revealing Americans are saving money at a rate nearly triple that of the same period last year. In the final quarter of 2008, Americans saved 2.9% of their net incomes, compared to less than 1% from the same time last year. Apparently, frugality is to blame. According to economists and a quote from a recent story appearing on FoxNews.com, this is known as the “paradox of thrift. What’s good for individuals – spending less, saving more – is bad for the economy when everyone does it.”
This all sets up to make us frugal types feel guilty over the current state of the economy. As if it is our fault that people borrowed up to their eyeballs (and then some) for two decades while our government leaned on banks to be even more liberal with lending policies. Sorry, but I’m not buying it. In fact, if frugality had been popular years ago perhaps we could have avoided the current crisis we are in.
How Did We Get Here?
We are all guilty of biting off a bit more than we could chew. Often driven by the inflated lifestyles depicted in Hollywood, American consumers adopted a voracious appetite for all types of luxury items, and quickly became debtaholics to afford the lifestyle. Borrowing against inflated home equity was “in.” Creative financing was “in.” Saving money and paying off debt was “out.” The prevailing attitude was, “We’ll just save money and pay off our debt sometime in the future.” Well, the future is now.
I wasn’t immune. I spent much of the late 1990s and early 2000s trying to figure out a way to get rich quickly. I even resorted to borrowing to invest because hours of watching CNBC made me feel like I was missing the boat. I caught the boat, but the hope of sailing home free quickly became a ride on the Titanic. I suspect many others went down with me.
How Do We Move Forward?
This period of reduced spending is likely to last. Many baby boomers have seen their retirement funds decimated. Many Generation X and Y workers have seen practically everything they’ve saved in a decade of work vanish in a few months. It is sobering to watch, and it will have long term effects on consumer psyche for some time. But here is the $64 million question: Is that really a bad thing?
Perhaps we all needed a little cold water thrown in our face. Granted, we didn’t need to be hit by a fire hose that was the 2008 recession, but I think this might be a wake-up call that was long overdue. We simply cannot continue to borrow our way to success – as individuals, nor as a country. I know this is a politically touchy subject with the current debate on the much-maligned stimulus bill, but it really is the truth. We are leveraging our entire futures in the hopes of a short-term gain, much like individual consumers did in the 1990s, and we’ve seen the consequences of those actions.
Should We Feel Ashamed By Our Frugality?
I’m far from the authority on frugal living, so I only speak for my family in saying no, we should not feel ashamed over being frugal. What’s odd is how things have come full circle. In the mid to late nineties when things were really clicking the idea of living frugal was a joke. Frugal people were made fun of for their thrift, or dismissed as being cheapskates. Then when things began to turn south suddenly frugality was cool again. Now, some are beginning to resent those of us who choose not to boost the economy by buying a plasma television we can’t afford.
I suspect this article will be the first of many from the media, who will soon begin to blame frugality for lack of economic recovery. I believe that blame is misplaced. They should be blaming themselves for perpetuating negative financial news for months on end. They should be blaming Hollywood for selling us on the idea that borrowing and irrational spending is sexy, and saving money is boring. They should be blaming politicians on both sides of the aisle for continuing to borrow and spend our hard-earned money on their own frivolous pursuits. And we should blame ourselves for falling for it.
If our economy is going to turn around we must first turn around our own personal balance sheets. Continue to build your emergency fund. Continue to get out of credit card debt. Continue to spend wisely. Continue to look for new side hustles. Once a thriving breed, the number of frugal followers may begin to shrink under the “patriotic” calls to spend beyond their means. Hold the line, my frugal friends, for this will be an epic struggle.