Your Crazy Spending Helps The Rest of Us

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Your Crazy Spending Helps The Rest of Us simple money man

 

 

For many people, the savings rate recommended by financial planners is outrageous whether it’s 10% or 15% of their annual income. For others, it’s a piece of cake. Increasing your savings rate by a significant percentage and on a consistent basis really does require a lifestyle change. You really have to give up some things or find cheaper ways alternatives and stick to them.

 

But I’ve wondered what if everyone started being frugal and saving huge percentages of their income. Wouldn’t that cause significant damage to our economy?

 

I mean we depend on people to spend so much money on random things every month because that helps many of us to keep our jobs, continue to save, and continue to look forward to one day relax in retirement.

 

For now and since the economy is continuing to boom, I don’t see any glaring indicators of everyone in the country suddenly becoming a super-saver with a big green cape and a money-sign etched on their chest.

 

 

Economic Factors

 

According to the National Retail Foundation, jobs in retail are 42 million and the industry contributes to $2.6 trillion to the US GDP annually. And retail sales are tied to consumer spending which makes up about 70% of economic growth.

 

It’s so easy for people to spend money nowadays. Shopping sites will automatically save your credit card information unless you tell them not to, there’s Apple Pay, there are smartphones where you can scan it on the register and it will deduct from the balance on your virtual card.

 

Then there are incentives to spend more like spend $50 and you’ll get free shipping, spend $1,000 and you’ll get 500 bonus points on a particular credit card, spend $5,000 and you’ll get $2,000 back – ok maybe not this last one because that’s just silly 🙂

 

Retailers are doing everything they can to make it more efficient for the busiest people to shop at their stores. Target is implementing tracking technology in its stores so when you open up its app you know where you are and where you need to go to the store to find something. Customers may be pleased with this experience and thus be enticed to visit and consequently spend more.

 

It’s important to understand that there is a dual motive behind these kinds of convenience: yes they can help the consumer out but they can help the retailer out too – I’ll scratch your back and hopefully, you’ll scratch mine. Even this year’s Black Friday sales were 17% more than last year. And a lot was contributed to online sales as reported by Amazon.

 

Whenever I go into a store I usually know where things are. It’s because I shop at pretty much the same (discount/wholesale) stores all the time. I’m never buying anything in a hurry anyway. Instead, I’ll just walk out of the store to research an item more, determine whether or not I still need it, and then I may or may not come back; no pressure here 🙂

 

 

Embrace Crazy Saving

 

I suppose if everyone were to turbo charge their savings rates it would help the banking and financial industry; deposits would increase and assets under management for Portfolio Managers. It would give more for banks to lend too.

 

Nevertheless, even if you are helping me with your crazy spending habits, I’d like to help you with some crazy saving habits. I get it; 15% may be a lot and let’s say you are only saving around 3-4% as many other Americans are per Business Insider.

 

How about trying to increase that to a half a percent by the end of the year?  So if you calculate your savings rate and it’s at 8%, try to get to 8.5% by the end of the year. And once that’s achieved try to get to 9% by the end of the first quarter of the following year.

 

Here is a simple way to calculate your savings rate. As you can see, I inserted some hypothetical numbers and the calculation just adds up all your savings (i.e., retirement contributions for the month, regular savings, interest earned, dividends earned and reinvested, and any other savings and dividing that by your total net income for the month:

 

SAVINGS % Per Mo. Based On Net Income
Your Income  $        2,000.00
Spouse’s Income  $        2,500.00
401K  $           300.00
Spouse 401K  $           175.00
After-tax Savings  $           125.00
Savings Account Interest  $            15.00
Brokerage Dividends  $            50.00
401k Dividends  $            80.00
Other Savings  $            25.00
Total Income  $        4,500.00
Total Savings  $           770.00
% Saved/Reinvested 17.11%

 

 

 

Everyone’s goal is different and it’s important for goals to be reasonable as well so that you can strive for them and achieve them. If you’re just starting out, don’t try to bite off more than you can chew. In other words, don’t say ok that’s it I’m saving half my income no matter what an then a month later give up and not save anything because you thought it was impossible because maybe it kind of was. Instead, take small steps so that they are attainable and can help you move forward. As Lauren Lyons Cole from Your Money Editor puts it, that gives you momentum to move forward and establish new and more challenging goals.

 

For now, the goal is to just to establish a goal.  So work toward becoming a super-saver like I mentioned earlier whose super-power is to be able to put money away for tough times and retirement, increasing those contributions periodically, all while not even feeling the pain. Because don’t feel a lot of pain right? 🙂

 

 

Do you feel good or bad when you’re friends tell you about their crazy spending, while you’re trying to save more? Do you sometimes feel deprived? If so, how do you deal with this feeling?

 

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I use Personal Capital because (1) it’s free, (2) it tracks all of my accounts and overall net worth, (3) my account balances automatically update, (4) it shows how my investments are diversified and allocated in various sectors, and (5) can use built-in tools like “Investment Checkup” to get….wait for it…free personalized advice!

 

 


 

 

 

20 thoughts on “Your Crazy Spending Helps The Rest of Us

  1. I think that there are a lot of wealthy people out there. They do not necessarily need to save such a high percentage of their income. If everyone cuts back dramatically it for sure will have an impact but fortunately for us investors that has never proved to be an issue (for to many years in a row).

    1. That’s true; spenders will continue to spend and savers will continue to save. It’s what’s in everyone’s own nature. But the recession in 2008 did show less in consumer spending and a result affected other things of course like production, jobs, import/exports etc.

  2. Interesting post SMM. I have wondered the same. I used to hear a lot about our low US savings rate holding the economy back. Now that consumer spending represents such a large chunk of US GDP, I’m not sure a higher savings rate would benefit our economy as much as it did in the past.

    To answer your question, when I was younger, spending by my peers had a much bigger influence on me than it does now. Now, I could care less what my friends, neighbors and family spend their money on.
    Tom
    Tom at Dividends Diversify recently posted…I’d Like to Introduce You to the JohnsonsMy Profile

    1. I’m totally with you on the second part. I don’t even pay attention to what my peers have now. I’m so busy with work, this site, the family of course and enjoying valuable time instead. Maybe when we were younger, we had the time to occupy ourselves with material influences. I guess getting older does have its benefits after all 🙂

  3. Hey SMM,

    I don’t have a background in economics, but this got me thinking about spending and debt. As in yes, spending does help the economy in the immediate term. However, if that spending is fueled by debt (such as credit cards), will there always be an eventual reckoning?

    Makes me think of the housing boom and crash: the housing market soars on the back of debt, but inevitably crashes later.

    I don’t have all the answers, but the dynamics are interesting…while I don’t believe in living beyond one’s means, is it macro-economically good that a big part of the population does? Or is it a short-term gain for long-term pain? I think it’s the latter, but can’t know for sure.

    1. Well, it’s like anything else in what goes up, must come down. The thing is when will it come down and how far down right? I haven’t researched the amount of credit card debt, which could be fueling the spending. But at least from a consumer stock sector standpoint, it is responding in a positive way. And that is helping the investment folks like ourselves 🙂

  4. This is a great article! You’re right, our economy is so consumption happy that if everyone magically became frugal, then there would be some sort of trickle down impact. We love dividend stocks, but how would the PG, JNJ, and other consumer staples continue to pay an increasing dividend if everyone stopped spending a lot on their products and opted for more frugal options. I’m assuming they would adjust, but you get the point. My guess is that there would be a new market that would emerge, a resale market or a market for more affordable products that accomplish the same thing. Think of how stores like Aldi are becoming players in the grocery industry or how Kohls has become a powerhouse. There will always be a great place for frugal minded people and lets face it, they have to spend on some things.
    Realistically though, that’s now how it actually is. Our frugal community is dwarfed by consumers that are more than happy to support the economy. It is sad and I wish the savings rate would increase dramatically. But it looks like this is here to stay.
    Thanks for the fun read tonight!

    Bert

    1. Dwarfed is definitely a good way to put it. Just by seeing how much of the country has saved in their retirement and/or savings accounts paints a clear picture that we as a country are consumer driven. And for dividend-focused investors like yourself, it’s quite beneficial. We go to Khols and especially when there’s a 30% off coupon in the mail. I wish there was an Aldi nearby so I could compare prices. However, from reading another fellow blogger, Walmart beat it on many products that we regularly buy. We have a super Walmart 5 minutes away and are lucky to frequent it 🙂

  5. People are buying buying buying (and unfortunately not saving). This is a timely article for consumerist Christmas. Amazon definitely makes it too easy to buy (especially Amazon Prime).

    1. I don’t have Amazon prime and one the reason is that I do not want to make it extra convenient for myself to buy. By eliminating some of the convenience it allows me to determine if I actually need what I am thinking of buying.

  6. It depends. If my friends are buying BMW’s, then yes, I do feel a bit down. But when I think about how I’m reinvesting in my own business, I feel much better.
    But if my friends are blowing it on Happy Hour, then I feel great. I honestly don’t see the benefits to wasting money at the bar every weekend.
    Troy recently posted…Best books for traders and investorsMy Profile

    1. True. At some level, psychologically we do tend to compare ourselves (some more than others) to our friends and peers. At that point we need to take a step back and remind ourselves of what our ultimate goal is and will that buy help or hinder our goal 🙂

  7. It used to bother me, probably because I didn’t understand how they could even afford it. However, my motto for a while has been everyone has their own path, values things differently than I do so unless they seem to need my help or want my advice, I will stick to my values/plans I know where I want to end up.

    1. Best way to go about it. To each their own; I think it’s all a part of growing up and understanding we have pretty much responsible for ensuring our future and material things may or may not result in lasting happiness.

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