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How to Know When to Spend and When to Save

The worsening financial crisis has led people to embrace the concept of saving. See more banking pictures.
Sharon Dominick/Getty Images

It's a confusing time to be a consumer. The government, the media and every reliable financial indicator tell us that we are up to our necks in an unprecedented global economic crisis. And to make matters worse, they say it's our fault.

The root cause of our current financial mess is a decade or more of runaway spending by governments, corporations and -- yes -- people like you. We bought homes we couldn't afford. We maxed out credit cards we didn't need. We buried ourselves under a mountain of personal debt without saving a penny for a rainy day, let alone the torrential downpour we currently face.

The result is that we've been seriously humbled. We no longer view the stock market as a risk-free investment. We no longer assume that home prices will continue to rise indefinitely. And we no longer treat saving money as a boring chore, like eating our vegetables.

Saving is, in fact, all the rage. Magazines and TV shows bombard us with money saving tips like sewing our own clothes, growing our own food and making our own toothpaste. According to a recent survey by the Pew Research Center for the People & the Press, 86 percent of Americans have cut their spending or changed their saving and investment plans [source: Hopkins].

Just as Americans are shunning their consumerist ways and going into deep survival mode, the government is selling a competing message: "Spend! Spend! Spend!" It makes sense: Consumer spending in the U.S. accounts for around 70 percent of the country's total economic activity [source: Crutsinger]. So when consumer spending drops, the economy grinds to a halt. Lower demand means lower production, which leads to mass layoffs, which equals a bad situation for just about everyone.

What, exactly, is a patriotic but poor citizen to do? If we spend money to bolster the economy, then we add to our pile of personal debt. If we bury jars of coins in the backyard, then we kick the chair out from under the economy.

Thankfully, this dilemma has a name: the paradox of thrift. Finding solutions, however, might be a little trickier. We'll learn more about the paradox of thrift on the next page, then we'll tackle some different "save or spend" scenarios.