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An Interesting Question: What if EVERYONE Was Financially Savvy?
By JLP | August 25, 2008
From Liz Pulliam Weston:
We personal-finance types constantly nag readers about spending too much and saving too little.
But what would happen if everybody suddenly took our advice? What if every household in America:
• Paid off credit cards in full every month and carried no high-rate debt?
• Had an emergency fund equal to at least three months’ worth of expenses?
• Saved at least 10% of earnings for retirement?
• Paid off cars before trading them in?
• Bought only as much house as it could afford?
Read the rest here.
I have often wondered this myself.
I found this quote from the article interesting:
“Right now, you want people to be spending, not cutting back,” said economist Jared Bernstein, director of the living standards program for the Economic Policy Institute and author of the book “Crunch: Why Do I Feel So Squeezed? (And Other Unsolved Economic Mysteries).”
My question is: who’s supposed to be doing this spending? Lots of people simply can’t spend any more money.
Imagine the effect of everyone saving 10% of their income. I have a hard time wrapping my brain around this one. On the one hand, I would think it would be good for the stock market. On the other hand, that money has to come from somewhere, which means someone would be hurting. Most likely it would be the retail sector.
If everyone paid off their cars before trading them in, there would be a lot less used inventory for the frugal buyers to choose from (especially those who like to buy 2-year old used cars).
Liz’s article is an interesting read.
Topics: Budgeting, Economics, Miscellaneous | 13 Comments »
August 25th, 2008 at 9:54 am
It’s an interesting conundrum. Increased savings means less spending assuming a steady income. The the retail sector hurts and the stock market retreats. People keep their money out of the market when it is declining, so still more money is saved rather than invested or spent.
The cycle breaks when people start feeling better about the economy in general. The government might encourage retail spending by creating in “economic stimulus,” but if the sentiment isn’t better, the public will save that money rather than spend or invest…
August 25th, 2008 at 11:35 am
Although the author of the article mentions some pretty sacred axioms in PF, i still question whether everyone has the same definition of “financially saavy”. Reason being, is there are the more conservative folks whose “saavy” has them heavier in asset protection strategies moreso than aggressive investments. For example, if we were all like the DR and Suze fans, i agree the retail and luxury sectors would die off, but many financial saavy folks know how to balance lifestyle vs. savings in such a way as to leverage good debt and still spend on the retail stuff. From there, the financial gurus may differ on what to do once you’re out of debt.
August 25th, 2008 at 11:43 am
JC,
That’s an interesting question. But, I think by savvy, Liz means the things she mentions in the article. Obviously, there’s different definitions for different areas, based on where people are in their lifecycle.
August 25th, 2008 at 11:51 am
The money is spent. If not by us then by businesses. With all these dollars chasing the investments we’d see low rates and high inflation. The market will place a price (not a return) on delaying consumption.
August 25th, 2008 at 12:07 pm
I don’t think we will have to worry about this happening anytime soon. Most folks want to keep on doing what they have been doing in the past.
August 25th, 2008 at 1:09 pm
Savings are spent eventually. If you save more when you are young, you’ll just spend more when you retire (hopefully). Otherwise what’s the point?
So not everyone can save 10% because some people live off of savings.
August 25th, 2008 at 1:34 pm
Very, very interesting theoretical topic. Thankfully we’ll never have to deal with the reality of these scenarios as long as the global economy is run by human beings.
August 25th, 2008 at 1:47 pm
In short .. the economy would be more like Europe’s
August 25th, 2008 at 2:41 pm
You brought up a lot of great budgeting and money saving tips that I am currently trying to enact in my family. It all starts with paying your bills on time and living within your means.
August 25th, 2008 at 6:14 pm
That’s a very interesting question. As you say, the money needs to come from somewhere and in effect, what you end up doing is simply shifting wealth. By helping someone, your hurting someone else… it’s a zero sum game.
There was an interesting link on the subject that was shared a while ago (not sure where I got it from – http://jim.com/econ/contents.html) which goes through the basic idea of ‘choice’ in an economy. Makes for interesting reading (the few chapters I’ve read through, at least)
August 25th, 2008 at 7:10 pm
People who consume benefit the economy in the short term, people who save benefit the economy in the long term. The latter is more favorable, regardless of what politicians say nowadays.
‘Misers’ are very good for society. They provide capital, they put that capital at risk, allowing businesses to take risk and expand.
In a world full of frugal people looking to retire early, the business world would be more focused on capital intensive cost lowering investments to make things cheaper (even more rapidly than business does so now – I am talking in real terms here) and less labor intensive.
The world wouldn’t stop, far from it actually.
August 25th, 2008 at 7:21 pm
As a financially savvy poor person, I can say that the poor won’t save 10 percent of their income even if they became financially literate.
August 27th, 2008 at 7:41 am
Our economy has become dependent on a market driven by people increasing their spending with time, rather than population increase. In both cases, there are natural limits and it is irresponsible for anyone to advocate spending on items not needed.