I’ve noticed something: when it comes to money, people tend to be loosey-goosey during the good times—taking shark-sized bites out of their monthly cash flow by increasing their debt load—and then try to unload everything they possibly can to stay afloat during the bad times. It’s one extreme to the other:
Good times = lease a new car, renovate a room, buy shiny new appliances, charge up the credit cards because we will be able to pay them off with our future income, daily lattes, etc.
Bad times = no lattes, cancel magazine subscriptions, cancel cable, sell the timeshare we never should have bought, unplug electronics when not in use, etc.
Whatever Happened to Moderation?
We’ve seen this play out recently with the Recession. Prior to the fall of 2008, the national personal savings rate (PSR: personal savings as a percentage of disposable personal income) was just around 0.7%. By the end of October 2008 when there were markets crashing, an uptick in foreclosures, general collapse of the housing market, tightening of credit lending and everyone was talking about the shark-infested waters ahead, the PSR climbed to 2.4%. That may not sound like much, but since the mid-1970s the rate has been cascading down, down, down, and down some more. In fact a higher PSR was sustained throughout the entire Recession than in the period leading up to it. This means that while people were in a better position financially, they chose to spend their resources instead of stock them away. They were part-time lovers of frugality.
Frugality is No Longer “the New Black”
Who wouldn’t tighten up their belts, pay down existing debts, and stash money away in savings with such a bleak economy? Yet, here we are just five years later and frugality is wearing off. It’s no longer “the new black”. Today the PSR seems to be floundering again. It is currently 4.4%, which is much better than the pre-recession 0.7%. However, if you look at the chart, it has plateaued. People have begun to flock back to their pre-recession, loosey-goosey ways. Credit card debt is increasing, auto loans are increasing, and student loans are increasing.
But what about maintaining frugality in the good times? You see, tightening your finances and being frugal will certainly allow you to survive bad financial times. But if you only use frugality during the bad times, you will fail to reap its full benefits. When you practice frugality just to survive, you don’t get the chance to stockpile. During the good times is when you can sock away money into your savings from living a simpler life, and when you can fill your cupboards until they are overflowing. And how do you save up for an emergency fund, the great neutralizer during the bad times? By practicing frugality when times are good.
It’s important for us to remember that the cost of what we are buying during the good times is not just what we spend on that particular day. The real cost will be felt more in the times when we are in need. Don’t be a part-time lover of frugality. Be a full-time lover, and reap the full-time benefits.