It's obvious that consumers aren't completely confident with the economy right now. It's easy to see why, too. Many are still feeling the bruises from the recent financial crisis, and it doesn't help that the media keeps emphasizing the horrible unemployment rates and the trouble in Europe either. On top of that, there are the upcoming presidential elections to add to the mess.
In scary and confusing times, most consumers tend to reduce their spending out of fear. This makes sense, but some economists believe this type of "retraction" from consumers only makes the economy suffer even further, and they encourage consumers to keep spending. Looking into that theory, should we really sacrifice our saving habits for the greater good of the economy?
"Businesses Are Flush with Cash"
Jeffrey Rosen, chief economist of Chicago-based research firm Briefing Research downgraded his predictions of future economic growth from 2% to 1% a few months ago, and he based this change on the growing uncertainty dominating consumers today. "If consumers and businesses can get over their fears, there are opportunities for growth," he said. However, he stated more facts that give consumers reasons to save rather than to spend.
He said that the average consumer debt-to-asset ratio is "1% above the long-term trend," and that "businesses are flush with cash." In fact, Rosen said that businesses have been sitting on almost $2 trillion in cash since the end of The Great Recession. Although the economy may not grow as quickly as it has in the past, these are not good reasons for consumers to sacrifice their saving habits. Should they do this so the economy can grow more than 1% and businesses can make even more money? These arguments are not strong enough.
Consumers should continue to focus on building up their savings, especially since "the long-term trend" of our debt-to-asset ratio hasn't been the best in the last few years, and Americans are still "above" this trend anyway. Not to mention the fact that businesses are currently sitting on a ton of cash. With this year's elections coming to a conclusion shortly, there have been clues that give consumers even more reasons to save as much as possible.
Keep More of Your Money
With the presidential elections going on, there's a lot of talk about the U.S. deficit, the levels of government debt that we all have to be concerned with and the upcoming fiscal cliff dilemma. Although there are different opinions on how the government can work on fixing these problems (including spending cuts across the board), some fear that an increase in taxes will be one of the main ways for Americans to get out of this debt hole.
Unfortunately, this may be true. The government might have to take more of consumers' hard-earned income to dig itself out of debt, and consumers probably won’t be able to do too much about it. What consumers can do, however, is keep as much of their own money as possible. Since the government will continue to take its share of people's incomes anyway (and might even start to increase its share), consumers are already putting money into helping the economy, so they shouldn't sacrifice their saving habits based on concerns for the economy. Americans should focus on paying themselves first so that they can continue to keep as much of their money as possible, both for their long-term and short-term goals.
Save for Now, Save for Later
When thinking about saving, retirement is usually the first thing that comes up, and it can be easy to see why this is a hard concept to grasp. Not only is the task of saving a difficult habit to stay disciplined at, but saving for a time that may never come can sometimes seem pointless. Who knows how long we'll all live anyway, and why not spend it while we've got it, right? Even though there are probably many who have those same feelings, saving habits aren't only beneficial for individual retirement plans, they're beneficial for all life plans.
The amount of money one will need in his/her nest egg for a comfortable retirement is becoming an ever-so-complicated calculation. Many find it very annoying to have to think about retirement. However, keeping your money and putting it aside for something bigger is a large part of anyone's life. Not only will Americans need a good amount of passive income to fund their retirements, but they'll also need to save up for other short-term goals. Buying a house, supporting children, and vacations that we all deserve now and then all fall under that list.
The Bottom Line
Don't worry about the economy not growing as fast as it once did because we are still saving. Don't worry about government debts not getting paid off due to the slowing economic growth. The government is already taking part of consumers' income to put towards solving that issue. It is your responsibility as a consumer to build your own wealth appropriately so that you can achieve your most crucial life goals, and don't let anyone else tell you otherwise. Saving may be tough, but it is a necessary habit to stay true to.
Photo Courtesy of 401(K) 2012
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