As far as savings is concerned, I insist on always having at least $5k in savings no matter what. Without car payments, student loans, etc, it is much easier to build a savings.

One thing I’ve never figured out is why people need large houses. I’ve lived in apartments from 600 sqft to homes just over 3000 sqft. Smaller is always best! You don’t keep as much junk, you don’t need to get more furniture, and repairs cost less because there is less. With a smaller house, I think it is easier to save money, too. Just my 1 cent…

The economy is basically a mirror of the housing bubble. Prices were driven up artificially by looser and looser lending practices, allowing people to buy a house with 10% down, and then 5%, and then 0% and finally negative amortization. If the brakes had been applied three years ago, it would’ve “negatively affected” house prices, but it would’ve prevented the even bigger mess we’re seeing now.

The negative savings rate has artificially boosted the economy for the last couple of years, allowing it to grow faster than it would’ve in a healthy state. At some point that boil needs to be lanced, and the longer the debt is allowed to build up the uglier it will be when it drains. It comes down to whether you think it’s better to have a small decline now or a bigger decline down the road. And furthermore, who cares about “the economy”? Obviously it’s better for the retailers if we all rush out and buy stuff on credit that we’ll be paying off for years to come. But it’s not good for consumers, the ones who have to pay it off. And it’s not really good for the retailers either, because the party has to end sometime.

That is only a short term outlook though, its not as if the wheels will come off if American’s stop spending. If people become more interested in Certificates of Deposit than Compact Discs, the makeup of business and industry will change as a response (much to the chagrin of the Chinese), but it will take time.

I also think having an economy based on people spending beyond their means is just sad.

I think it’s going to stick around 0.

Americans have been spending beyond their means, so their savings rate has been negative. As cheap, plentiful credit dries up they won’t be able to continue doing that. However, they aren’t likely to cut their lifestyle back any more than absolutely necessary — which means going back to spending every dime that comes in: 0% savings rate.

Yes, the PF blogging community is filled with examples to the contrary, but I think we’re actually a pretty small group. Joe Consumer is going to keep on spending to the limit of his ability. That ability is just going to be a little smaller now.

Will the economy suffer? Yep! If the average U.S. consumer has been overspending by 1% and has to stop, then the economy is going to reflect that average 1% drop in spending. That’s a definite drag.

Now, if Joe Consumer does suddenly wakes up, educates himself about personal finance and develops discipline… well, who are we kidding? That’s about a likely as me winning the lottery (and I don’t buy tickets!).