The Government Loves Spenders

At least in America the engine of growth over the past few decades (minus the past 5 years) has been consumer spending. Never mind that a good deal of that spending was on credit rather than in cash, the American consumers freewheeling ways have enabled corporations to amass huge war chests and have paid for the continued growth of the GDP and expansion of government.

As long as Americans continue to increase their savings rate they will not be spending and this will hamper any increase in the economic recovery…or so we would be led to believe.

Stop Spending and Start Saving like Your Grandparents

I found this interesting chart over at All Financial Matters which leads me to believe that consumer spending as a percentage of GDP needs to come down even more before a full recovery can take place. As you can see during the great depression consumer spending was a much bigger part of GDP than during any other time in the past 100 years. It wasn’t until WWII came along that consumer spending dropped and after the war came back in at much more reasonable levels. Coincidentally, this was also one of the greatest growth periods of the US.

Putting aside all macroeconomic discussions it is simply good common sense to live more frugally and to save a good portion of what you currently earn. If the past 5 years taught us nothing else it should have made it glaringly clear that growth is not forever and that your jobs are not as secure as you may have once thought. And even if you do manage to stay employed for you entire adult life what will you do when it is time to retire? Life spans are increasing and those living in developed Western countries may easily expect to live for 20 years after their retirement.

I know how easy it is to give in to instant gratification and to think that there will always be time to save, but the truth is that the best time to save is now. You might be surprised at how little you miss just 5-10% of your income when it is automatically deposited into an account separate from your spending money. And I have no doubt you will also be surprised to see how quickly that money can grow if invested wisely.

Take a lesson from your grandparents and learn how to save for a rainy day. Ultimately you should strive to save 30% of your income if you really want to put your money worries behind you. I know that sounds like a huge amount, but you don’t have to jump right up to 30%. Start with 5% and get comfortable with that. See if you can push it to 10%. Start using more coupons and shopping only when necessary to replace needed items. Haggle and buy used or at least wait for sales to come along before you buy. Add the extra money to your savings. Cut back on eating out and expensive habits and hobbies and add that money to your savings too. There are a multitude of ways to save money if you really start to examine your spending, here are 25 from KrantCents to get you started.

I’m personally nowhere near the 30% guideline (more like 10%), but I am looking for ways each month to increase my savings and so should you. Fortunately I don’t have to go it completely alone as there are many great folks writing about how to make a dollar stretch further. Maybe you can help by letting me know about some of the imaginative things you do to save more money each month?

• Maybe it’s the fault of our government who continues to propagate the idea that they will take care of us, that we are entitled to a certain standard of living and who continues to spend more than they make by a wider margin every year.
• Or perhaps we can blame the media companies who put all the latest gadgets, toys and shiny playthings in front of us continually with the message that if we don’t have these things we are missing out and somehow less successful than our peers.
• Or we can blame the entertainment industry; who tell us that everyone should be living a dream and push us to buy all the trappings of that dream life.
• Maybe it’s our neighbors fault because they keep buying new things for their houses, new cars and electronics and if they have a landscaping service don’t we need one too…

In all honesty we have no one to blame but ourselves if we are living beyond our means. We have control of our financial destiny and no one else is going to care if we are broke when we should be retired and enjoying our golden years. Take responsibility for your finances and block out all the noise from outside. Look inside yourself and take stock of what you really need to make you happy. Chances are it’s not a new iPod or a new BMW or new furniture. It certainly isn’t mountains of debt that only make the banks and credit card companies richer. Chances are many of the things that will make you truly happy require very little money.

It may seem painful initially and many of us shy away from taking a close look at our finances for fear of what we’ll find, but you need to start out by creating a budget to find out how you SHOULD be spending your money. Once that’s done track your spending for a month or two to see if that is really how you ARE spending your money. Chances are there are a lot of little things you buy that aren’t in your budget. These could add up to hundreds of dollars a month (I know in my case they did). By simply becoming aware of where your money goes you might be able to get to the point that you’re spending less than you make.

One thing I can guarantee is that if you’re living on less than you make you’ll have less stress in your life. Small emergency expenses won’t create a huge problem for you because you’ll have the money to cope with them. You won’t be dwelling on where you’re going to get the money to pay this bill or that bill each month. You’ll know that you’re building a solid foundation for your future and I can tell you it will give you both a feeling of relief and satisfaction.

Another thing you’ll find once you’re living on less than you make is increased freedom. When you’re trapped in the debt spiral or living paycheck to paycheck you often have few choices in where your money gets spent or how much of your time you need to trade for the money that you need. Once you’ve gotten to the point that you spend less than you make all sorts of choices become available. The choice to quit your second job or turn down overtime and spend more time with your family is priceless. The choice to get away for the weekend with your spouse or take your family on a week long vacation WITHOUT increasing your debt is wonderful. The choice to follow your dreams, whatever they may be, often only opens up once you have the freedom from living paycheck to paycheck.

If you’re still spending more than you make then I highly recommend you take a look at your finances and make a plan TODAY to get that under control and spend less than you make. It may be a struggle initially, you may feel overwhelmed or like you’ll never be able to make it work, but if you don’t make it work now you’ll end up in a much worse place. Plus I can guarantee that once you get your spending in line with your income you’ll feel more relaxed and more happy overall.

So why is it that this past Sunday and Monday you would have found the Money Infant and Mrs. Infant happily staring at the one armed bandits in Atlantic City NJ? You would think that even an infant would have learned that gambling is a definite no-no when it comes to personal finance, saving and building wealth.

It’s true, I do know about the evils of gambling and normally wouldn’t even think of such a trip, however Monday was Mrs. Infants’ 28th birthday and when asked what she wanted for her birthday she gleefully replied “A trip to AC!”. Always the loving husband I happily complied and immediately looked into our budget to see what kind of damage such a trip would make.

Now, if we were still struggling month to month or paying down significant debt I never would have considered this trip. If we didn’t have a clear budget and goals I also definitely wouldn’t have considered this trip. However, since I know where we stand in regards to paying off our remaining debt, saving and what our budget is, I felt we could safely take a moderately priced weekend getaway.

I firmly believe that no person or couple can continually keep saving or paying off debt without being able to occasionally blow off some steam as well, whether that means a weekend in the wine country, a day (or week) at the beach, dinner at that expensive new restaurant or in our case a weekend gambling away our hard earned cash in Atlantic City. While financial freedom is the most important goal for all of us, balance in our lives is important too and I don’t think it’s healthy to obsess too much on one aspect of your life. If you’ve gotten to the point where you have some discretionary income each month it’s not always necessary to stick that extra money into savings or use it to pay down debt…sometimes you can splurge. One of the beauties of financial freedom is being ABLE to do this occasionally without hurting your budget or feeling guilty.

One of the things that scares people away from budgeting is that it makes them feel trapped, like they have to robotically follow their budgets no matter what. A budget is not designed to trap you into spending or saving. It is simply a guide to your personal finances. A road map to your destination of financial freedom. Sometimes you’ll follow it towards the expressway and you’ll be closer to your goals faster and other times you may want to relax a bit and take the scenic route. Either way is acceptable, it all depends on your personality and goals.

Plan well with your budget, but don’t feel that you’re trapped by what your budget says you should be doing. As long as you’re moving towards the goal of financial freedom; paying down your debts, saving for retirement, building your emergency fund and most importantly spending less than you earn, you will be fine in the long run. Your personal finances are not a sprint, they are a marathon and a budget is by no means written in stone. Take the slow road occasionally and you’ll likely find that you come through refreshed and ready to take your finances to the next level.

Oh and the end result of our trip to Atlantic City was not too bad at all. After gambling for about 15 hours over 2 days we were down just $50. So basically the cost of the two days was our room at Caesars ($140) and a wonderful birthday dinner for Mrs. Infant at Dock’s Oyster House ($120 and worth every penny). All other meals and drinks are included in the $50 loss, so gambling was actually a bit better than break even. I would consider that a pretty cheap 2 days in Atlantic City!

This is all to the good, but is there a point at which frugality becomes just plain cheapness?

Dictionary.com defines frugal like this:

economical in use or expenditure; prudently saving or sparing; not wasteful

Cheap on the other hand is defined as:

stingy; miserly

I think we can all agree that none of us want to be thought of as stingy and miserly; words that bring up images of the Grinch and Mr. Scrooge. And yet in an effort to be prudent with our spending I think that may be where some of us are headed.

As an example, a family making $40,000 a year would be considered frugal if they planted a garden to grow their own vegetables. They would have great fresh vegetables, maybe even some fruits and would be able to save hundreds of dollars on their grocery bills yearly. One could easily say they were economical with their use of time and their land and that growing the vegetables was a prudent way to save money.

On the other hand, a family making $120,000 a year would actually be more frugal if they bought their vegetables in the grocery store. The reason I say this is that the second families time has more value doing something other than growing their own vegetables. Using their time to grow vegetables would be an expensive proposition all things considered. The neighbors might even think of them as cheap since using their time in such a way is not really economical.

I know the example might be a bit far fetched, but the idea is to make you think about your own behavior. Are there cases where it might make sense for you to actually spend money rather than saving it or doing a task yourself? Do you think of your time as a resource with a value? You should because your time most certainly has value. Otherwise why would your employer pay you a salary? They are simply exchanging money for time. One resource for another.

We all need to make wise choices about how we allocate our resources, whether that be time, money or some other tangible or intangible resource. If you’re not currently putting a value on your own time then you may be less frugal than you initially thought. Sure you might think you’re being economical and prudent when you make your own clothes or when you grow your own vegetables, but the truth could be that you’re being cheap with your time.

I know I’ve been guilty of doing this myself and am still guilty in some respects. There are many tasks that I do in my own business that would probably be better outsourced so that I had more time to do other, more profitable tasks. I have trouble fully valuing my own time and may even be holding back the growth of my business and my potential earnings because of it.

Going forward I will be taking a conscious look at how I spend my time and deciding if I am really the best person to be doing a given task or if I’m just being a cheap Charlie in the name of frugality.

What about you? Have you ever found yourself doing something because you thought it was the frugal thing to do when in reality you would have been better off paying someone else and using your time more profitably?