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Will consumers continue to hold down spending or has frugal fatigue set in?
Frugal Fatigue and Spending
by Gary Foreman
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Recently I've had a number of conversations about how the economy of the last four years has changed the way that many people think about money.
Historically, in the 60s and 70s, our personal savings rate had been in the 7% plus range. Gradually it descended all the way down to about 2% by 2007. It rebounded sharply to the 5% range when the recession started. (St. Louis Federal Reserve)
Or consider credit card debt. The total amount owed grew until 2007. For years in a steady upward trend. But credit card debt shrank 9% in 2009 and another 7% in 2010.
But a curious thing happened in 2011. By mid-year, people began taking on as much debt as they were repaying. And in the fourth quarter, they actually increased the amount that they owed on the credit cards. (Federal Reserve)
With that in mind, I've been wondering if the newly adopted frugal ways will disappear when consumers either feel more comfortable about their income or just get tired of stretching a dollar (aka "frugal fatigue").
One expert I sought out to discuss the issue was Guy Hatcher. He's a CFP® and the founder of Advanced Planning, Inc. He's been in the financial planning business since 1987. That experience allows him a longer perspective that includes past recessions and what we learned from them. What follows is a series of questions I asked Guy and his responses.
Gary - I've heard you believe that the recession has changed people's financial goals. Could you explain for us?
Guy - Along with the economic challenges we have all faced and the constraints of extra cash flow, not only from a government standpoint, but also each of us as individuals, the majority of consumers have had to make some serious financial choices. In our customer base, we're having conversations about downsizing, both in material and tangible purchases as well future expectations. Their goal is to increase their quality of life by eliminating a lot of the associated financial stress in trying to maintain higher expectations. Many have concluded that bigger, especially in regards to an increased quality of life, is not always better.
Gary - How can people make sure their financial goals don't conflict with other goals?
Guy - Typically, people's goals are tied directly to their finances. The type of house, car and vacation they go on this year are all types of goals tied directly to their finances. Even a new diet or exercise program will typically include some type of extra expense that people are now looking at more carefully. Prior to these economic challenges, it seemed more prevalent to base personal worth on a scorecard of "money." But this recession has thrown away that scorecard for many families, and they are now focusing more on life improvement goals like spending more time around the dinner table with the family, increasing community involvement, and strengthening their relationships with their family and friends. People have redefined what is truly important to them, and in doing so, their financial goals are better aligned with their personal and family goals.
Gary - What positive lifestyle changes have you seen?
Guy - Again, using my customer base as a sounding board, people are downsizing their homes, reducing debt, using their credit cards less and less, and have less expendable debt. They prioritize sharing an experience together over independent and extra-curricular spending. Many have even renewed their faith and have increased their church involvement as a family.
Gary - Do you think that the lifestyle changes will remain if the economy gets better again? Or will people revert to their old ways?
Guy - The '08 financial crisis shook our foundational belief in the efficiency and financial security of our government. The average consumer is now aware of the instability of not only our local economies, but also the governmental systems here and across our borders. What is it that we don't really know, what has yet to be revealed about our local and world economy? I believe it is this kind of insecurity that will help to keep people's personal financial situations in check for the future, especially for the current generation going through it; much like the generations of the Great Depression.
Guy makes a good case for consumers staying more cautious about their finances. Back in the 1980s, as a financial planner serving retirees, I saw it firsthand. People who grew up during the Depression were well aware that markets collapse and nothing financial is ever really guaranteed.
But, there are others who point to the fourth quarter spending statistics and suggest that consumers will bounce back just like they have in previous recessions.
Why is that important to you? Perhaps what everyone else does isn't important. But what you choose to do is. Until recent years, you might have spent too much money that you didn't have and built up debts in the process. My hope is that Guy is right and we all use the current recession as a learning experience. A lesson that we need to live within our income and save a portion of every paycheck for retirement or unplanned future expenses.
Also that what he calls "life experience goals" are not abandoned. Many people have discovered that you can have a fulfilling life without spending lots of money. It would be a shame to lose that knowledge.
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Gary Foreman is a former financial planner and purchasing manager who currently edits The Dollar Stretcher.com website and newsletters. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report and he's a regular contributor to US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+. |
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