DEAR SMARTIES: I’ve been feeling kind of guilty that I’ve been cutting back on my spending, as far as the economy is concerned. After 9/11, we thought it was our patriotic duty to go out and spend. We probably overdid it. But what about now, that the economy is sluggish? I read that economists are upset that consumers aren’t spending enough.—Guilty in Glendale
HEIDI: Economists cannot simply say that if people slow their spending, the economy slows, too. Consider, for example, the fact that, when the economy slows, prices go down and that stimulates sales. For people who can buy, they get the best deals. Also, if people are saving, and putting their money into a bank, instead of into stores, it helps the banks lend money, which helps create new businesses, which help stimulate the economy.
SAM: What Heidi says is true. But some people may still be waiting on the sidelines before they start spending, even with falling prices. Others cannot take advantage of falling prices if they have lost their jobs or are concerned about losing them. Also, her reasoning assumes that banks are lending money. If they are hoarding money too, just to prop up their balance sheet, they are not lending to businesses that need them to create jobs, etc. Banks lost major net worth with all the mortgage defaults. They have set up new and stricter requirements for credit, due to lessons learned in this recession.
As far as the economy is concerned, (if that is your first priority): If you are not putting money in a bank, just hoarding it in your vault, it is not stimulating anything in the economy. As far as your own personal economy is concerned (and that should be your first priority, in our opinion): If you’ve got extra money, pay down all your debts and then make investments that will support your ncial independence rather than increase spending.
DEAR SMARTIES: A lot of the financial advice seems to apply to people who have money to invest in Roth IRAs, etc. I live very frugally on my Social Security benefits., barely covering my food and rent. What about those of us who are on benefits programs? We need financial advice, too.—Frugal in Fontana
HEIDI: We believe that everyone needs to save, regardless of the size of income. Even though you are covering your food and rent with little to spare, there are other ways to save you have not thought of yet. Go to the library and read books on saving, including our book. If you make tradeoffs, you can create a buffer fund to give you some security.
SAM: Also, figure out ways to make more money. Can you do babysitting, house sitting, plant sitting, dog walking, or be a part-time companion or personal assistant?
DEAR SMARTIES: I used to think that people who lost their jobs obviously were not trying hard enough. However, that is not true. I see how people treat my friend who just lost his job. Some are supportive, but others avoid him. –Fathful in Fallbrook
SAM: Job loss is hard and it takes courage, creativity, and initiative to find a replacement in a recession like the one we are experiencing. Be helpful and supportive, as you would hope your friend would be for you, if you were laid off.
HEIDI: Here is a phrase my mother taught me when I was young: “There, but for the grace of God, go I.” It is never a good idea to look down on someone, no matter how confident you are “that will never happen to me.” Sometimes life has some surprising twists and turns, as we are starting to see these days.
Samuel K. Freshman and Heidi Clingen are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them at Heidi@TheSmartestWay.com.
