For a significant number of American families, there is no "save or spend" dilemma. That's because there isn't any money left to spend. For these citizens, patriotic duty will have to wait for better days. The paradox of thrift is yet another luxury they can't afford to worry about. Their only solution is to save, save, save.
In June 2009, the unemployment rate in the U.S. hit 9.5 percent. According to surveys conducted by the Bureau of Labor Statistics, the number of discouraged workers -- unemployed workers who believe no job is available for them -- rose to nearly 800,000. Another 430,000 people have stopped looking for jobs altogether [source: Goodman].
If you are already deeply in debt and out of a job, there's no rational reason to start investing in home improvements or other long-term "spend to save" strategies. The only productive behavior is to use every spare penny to pay down debt and try to dig yourself out of the financial hole.
Some economists are calling on the government to send out a clearer message to American citizens. Instead of falling back on Keynes' call to patriotic consumerism, they want leaders to present two separate but equally important messages: If you have a job and no debt, then do what you can to invest in goods and services now that will save you money later. If you have debt problems or are unemployed, pay off your debts first and try to build an emergency fund [source: Hopkins].
In other words, if you can't spend to save, then save to survive. Once you're back on your feet again, though, you must put your hard-earned lessons into practice. No more maxing out credit cards and no more living beyond your means.
Unfortunately, that might be harder than it sounds. Saving, as we discussed, does not come easy to most Americans. According to one recent survey, 76 percent of respondents believed that Americans would return to their old consumerist ways once the recession ends [source: Parker].
The professionals, thankfully, have a more optimistic view. According to a Wall Street Journal survey of 46 leading economists, 43 believe that we have entered a new economic era and that the saving trend is here to stay [source: Kalita].
For lots more information on debt, personal finance and saving money, follow the links below.
Related HowStuffWorks Articles
- Associated Press. "U.S. savings rate hits lowest level since 1933." January 30, 2006 (June 29, 2009)http://www.msnbc.msn.com/id/11098797/
- Blankenhorn, David. "There is No 'Paradox of Thrift.'" The Weekly Standard. June 15, 2009 (June 29, 2009)http://www.weeklystandard.com/Content/Public/Articles/000/000/016/592bjsid.asp?pg=1
- Brockman, Joshua. "As Economy Falters, Should We Spend or Save?" National Public Radio. October 17, 2008 (June 29, 2009)http://www.npr.org/templates/story/story.php?storyId=95836911
- Caplinger, Dan. "Spend a Little, Save a Lot." The Motley Fool. June 4, 2007 (June 29, 2009)http://www.fool.com/personal-finance/home/2007/06/04/spend-a-little-save-a-lot.aspx
- Crutsinger, Martin. "May incomes surge, but savings outpace spending." Associated Press. June 26, 2009 (June 29, 2009)http://www.google.com/hostednews/ap/article/ALeqM5gNiyJ905Ho0Ur96V2TQhsBX19lGwD992GI980
- Federal Reserve. "Consumer Credit." June 5, 2009 (June 29, 2009)http://www.federalreserve.gov/releases/g19/Current/
- Goodman, Peter S. and Healy, Jack. "U.S. Job Losses Rise in June as Unemployment Reaches 9.5%." The New York Times. July 2, 2009http://www.nytimes.com/2009/07/03/business/economy/03jobs.html
- Hamm, Trent. "The Paradox of Thrift: Is Saving Money Bad for the Economy?" The Simple Dollar. May 28, 2009 (June 29, 2009)http://www.thesimpledollar.com/2009/05/28/the-paradox-of-thrift-is-saving-money-bad-for-the-economy/
- Hopkins, Andrea. "To save or to spend? Reuters. Americans ponder their duty." February 13, 2009 (June 29, 2009)http://www.reuters.com/article/ousiv/idUSTRE51C19J20090213
- Kalita, S. Mitra. "Americans See 18% of Wealth Vanish." The Wall Street Journal. March 13, 2009 (June 29, 2009)http://online.wsj.com/article/SB123687371369308675.html
- Leonhardt, David. "To Spend or Save? Trick Question." The New York Times. February 10, 2009 (June 29, 2009)http://www.nytimes.com/2009/02/11/business/economy/11leonhardt.html
- McArdle, Megan. "Bad news, and the paradox of thrift." The Atlantic Monthly. January 28, 2009 (June 29, 2009)http://meganmcardle.theatlantic.com/archives/2009/01/bad_news_and_the_paradox_of_th.php
- Parker, Vicki Lee. "Spend some and save some." The Seattle Times. June 21, 2009 (June 29, 2009)http://seattletimes.nwsource.com/html/businesstechnology/2009364092_pfmoneytip21.html