How to Know When to Spend and When to Save

Spending to Save

Spend a little cash on maintenance now and save yourself a lot of trouble -- and money -- down the line.
Spend a little cash on maintenance now and save yourself a lot of trouble -- and money -- down the line.
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Many people have been hit hard by the recession, and it seems as if everyone has caught "saving fever" as a result. Of the 86 percent of Americans who have cut their spending or changed their savings and investment strategies during this recession, more than half of them have yet to feel the financial pinch personally [source: Hopkins]. They're saving money as a buffer against an uncertain economic future.

In addition, despite statistics asserting that Americans carry more than $2.5 trillion in personal debt, millions of American families have money in the bank, mortgages they can actually afford -- and no credit card debt [source: Federal Reserve]. These lucky folks are the people who are in the best position to spend money during a recession. However, that doesn't mean that it's their patriotic duty to go on wild shopping sprees to make up for the meager consumerism of their neighbors.

Instead, financial experts say, people without debt should look at the "save or spend" riddle from a different perspective. Instead of using their money to consume, they should use it to invest [source: Leonhardt]. When economists talk about investing in this sense, they're not talking about stocks and bonds. Instead, they're talking about products and services purchased today that will save you money down the line.

The mantra is "spend to save," and here are some examples:

[sources: Leonhardt, Caplinger]

The "spend to save" philosophy is a convenient solution to the paradox of thrift, because the individual is helping himself over the long term while stimulating the economy in the short term.

Of course, in order to save, you have to have money to spend. On the next page, we'll look at an interesting twist to the paradox of thrift.