So, Should We Save or Spend?

Another interesting article (subscription required) in the Wall Street Journal about Americans becoming thriftier as the economy gets worse (or they perceive it to get worse).

It basically says that the economy will suffer worse because Americans are starting to save more.

Uh Huh. And how is it a bad thing to save more and spend less?

Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."

U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.

That has resulted in a rise in the personal saving rate, which the government calculates as the difference between earnings and expenditures. In recent years, as Americans spent more than they earned, the personal saving rate dipped below zero. Economists now expect the rate to rebound to 3% to 5%, or even higher, in 2009, among the sharpest reversals since World War II. Goldman Sachs last week predicted the 2009 saving rate could be as high as 6% to 10%.

As savings increase, economists say, spending is likely to contract further. They expect gross domestic product to decline at an annualized rate of at least 5% in the fourth quarter, the biggest drop in a quarter-century.

"The idea that the American family will quickly spend us out of this recession is a fantasy. It won't happen," said Elizabeth Warren, a professor of law at Harvard University who last month was named chair of the Congressional oversight panel tasked with overseeing the distribution of the government's Troubled Asset Relief Program funds.

I understand the argument that spending will helps us out of the recession - but how about the argument that we don't need to spend frivolously. Maybe families don't need three cars, a boat, and four wheelers.

My spending has gone down but not significantly. I save all year to buy Christmas gifts and spent most of our gifts fund...that is what it is for. We plan to take a few days in April to celebrate my hubby's 40th birthday - the cabins are at a minimum $200 a night. I bought two Wii games after Christmas. All unnecessary spending but not spending that I see as detrimental to our overall budget.

Could things get tight? Heck yes. If I lose my job I certainly won't be spending money on video games.

But our savings has increased as well. I just paid off my car - WOOHOO! And that extra money each month will go into our various savings accounts. I don't see that as a bad thing. Sure, I could take that $400 a month and spend it in the "economy" but that would not create more security for my family in the long run (though hubby would argue that ammo does increase security and he'd love to spend that money on ammo each month!).

The article focused on a couple of families who made decisions many of us made in the last decade. Refinancing to pay for home improvements, with the belief that the house would continue to increase in value, is something we did at least twice (I think maybe three times). But the bank never let us take out more than the home was worth at the time, limiting us to 90% of the value. And we used that money each time to make a home improvement and pay off other debt.

I also always cautioned my hubby that we need to be careful because home values don't always go up (look at me...I made a prediction! LOL). Thank goodness I'm more cautious than some others. I never looked at our house as a piggy bank for 'stuff'.

I have no idea if our house has dropped a ton in value ... I'd rather not think about it. We're not going anywhere soon so we're still investing in our home. We just installed new floors in the living room and hallway.

Pretty, right? The dogs seem to like it.

So we're still doing our part to stimulate the economy. Just not on "crap" we don't need.