“My generation doesn’t know how to be thrifty,” writes Eve Conant in the current issue of Newsweek. She describes how her grandfather — who fled his native Ukraine during World War II — would store plastic bags filled with leftover bread crusts in the closet of his new home in California, a house he bought with $13,000 cash. “He couldn’t shake old habits,” Conant writes. “Or were they old virtues?”
Now, many decades after Arkady’s arrival, I also have plastic bags in my closet. But they’re filled with nice clothes I’m giving away because my wardrobe is too full. The biggest life issue facing me when I open my closet door is whether to put on an Ann Taylor jacket or a Gap sweater. As talk of recession and belt-tightening makes headlines, I wonder where and how I lost my grandfather’s sense of thrift.
These sentiments aren’t exactly new. For decades — centuries, even — people have complained that younger generations haven’t inherited the financial wisdom of their elders. During the 1750s, Benjamin Franklin bemoaned the lack of money skills among the American colonists. But these warnings took on greater urgency with dawn of the age of easy credit. In the introduction to Ain’t We Got Fun?, Barbara Solomon writes:
Prior to the 1920s the public had held generally negative attitudes toward credit purchasing. Young people were warned against burdening themselves with a lifetime of debt and were made fearful of losing their possessions should they fail to make payments on time. In the Twenties all that was turned around.
Advertisers promised an acquisitive public that it needed no money down and could get liberal terms. Millions of ready buyers were convinced that there was no need to deprive themselves of the magnificent new appliances and machines of this age of progress. In 1927 six billion dollars’ worth of goods (about 15 percent of all sales) were bought on installment plans. And the factories kept on producing more merchandise.
The general sense of prosperity, coupled with the disillusionment of wartime idealism, became the basis of a new theme that dominated the age. The mass of Americans believed that they had an inalienable right to the good life and particularly to “a good time”. And a good time they determined to have.
Never before had a generation set out to be so self-consciously different from their forebears.
What had been one of American history’s recurring motifs now became a primary theme. Attitudes toward money, debt, and credit actually did begin to change. During the next several decades, the use of credit lost its stigma; it became an accepted — even celebrated — way of life.
In Conant’s Newsweek article (which I recommend highly), the author worries that this lifestyle of debt has made her generation ill-equipped to handle financial hardship. “How often do the words ‘frugal’ or ‘thrifty’ come up in conversation, especially as a compliment?” she wonders. From her story:
“People in their 30s haven’t really experienced a significant or long recessionary period,” says consumer behaviorist Larry Compeau of Clarkson University. “I am concerned that they won’t be able to respond quickly enough to mitigate what may be the damage ahead. Not only do people under 40 save less, but they have less to save.“
My worry is not that we’re saving less, it’s that we’re no longer saving at all. The personal saving rate in the United States has been declining for years. In the 1970s and early 1980s, it frequently climbed above ten percent. More recently, it has hovered around zero. But the general trend is downward. Americans are not saving.
The personal saving rate began to drop in the mid-1980s. A 2002 publication [PDF] from the Federal Reserve Board of San Francisco notes three possible causes:
- The “wealth effect”: When people become richer (or perceive themselves to become richer), they spend more.
- Americans have become more productive and are, in general, earning higher wages. If they believe these increased incomes are likely to continue, they’re willing to spend more because they believe they’ll have money in the future.
- Easy access to credit. Though the first major credit card was created in 1958, and use grew in the sixties and seventies, credit cards didn’t play a prominent role in American life until the 1980s.
Though the Federal Reserve Board believes consumer credit plays some part in the low saving rate, it isn’t considered a primary factor. I’m not convinced. The total level of consumer credit outstanding has waxed even as the saving rate has waned. I realize that correlation does not imply causation, but I’d love to see more information about how the following graph relates to the first:
From what I understand, this does not include debt secured by real estate.
What does all this mean? Does it matter to you and me? Is the subprime debacle related to personal saving at all? Could the stock market collapse? Will the credit industry implode? And what happens if the worst comes to pass?
I don’t know.
The financial picture seems bleak. Even the most optimistic believe we’re in for a couple years of rough times financially. The pessimistic are whispering we could be heading for an economic collapse to rival the Great Depression. In either case, prudence would indicate that it’s time to buckle down.
For myself, I will to continue following the tenets of the “get rich slowly” philosophy. I’m going to stick to the basics. I’ve shed my non-mortgage debt, and I don’t intend to take on any more. I will continue to save. I’ll stick with the frugality that has served me well over the past three years. I will live below my means. If my friends ask my advice, I’ll recommend that they do the same.
Now is not the time for $2,500 plasma televisions. Nor is it yet time to store bread in the closet. But it is time to stop spending and to begin saving. Just like our grandparents did.
Note: Please see the comments for some important clarifications of these economic notions. For example, real-life economist JerichoHill writes: “The Personal Saving Rate is a very poor metric. Most folks save via IRA and 401K. So we should look at that savings rate, which is the National Saving Rate. The NSR shows the same disturbing downward trend, but is the more proper metric to use, in my opinion.”
This doesn’t change my primary point — that a return to frugality and thrift is the best way to cope with financial hard times.
SEARCH FOR RECENT ARTICLES
Um. Wage growth has been positive only when discounting inflation. Taken with inflation wage growth for non-management positions has been stagnant or even decreasing in recent years.
loading....
Of the three possible causes listed by the Federal Reserve Board of San Francisco, I feel that easy access to credit is the most likely cause of the decrease in savings. People in our generation rely more and more on credit cards to cover emergency expenses.
loading....
Finally Frugal asks: “My mom told me that grandma still had (AND USED) a toaster that was about 20 years old. Same thing with her iron. How many of us can say the same????” I just wondered how many of us think the toaster we do have will last 20 years? Few products seem to consider durability to be worthwhile any more. This idea has come up before. It might just be cheaper to buy that $100 toaster that will last 20 years, as oppossed to buying a new $20 toaster every 2 or 3 years.
loading....
J.D.,
I would like to encourage you to continue to write some of these types of stories. Even if you felt that the story was “Dark” (and by the way, I did not feel that way about it), it is relevant to the atmosphere that we are in today. Recession or not, I think a lot of people are starting to take a good hard look at finances, and articles like these bring a different perspective to the table.
Keep up the good work.
Ian
just
loading....
“It might just be cheaper to buy that $100 toaster that will last 20 years, as oppossed to buying a new $20 toaster every 2 or 3 years.”
That is, if the $100 toaster (or whatever appliance) is better made than the $20 one, which isn’t always the case. Take the example of a toaster oven…my husband recently researched them online, and the expensive ones were just as crappy as the cheap ones. They just had better looking exteriors with stainless steel or other trendy extras that increased the price. But they had just as many negative reviews from purchasers claiming that they broke within a year or two. We ended up buying the low end one, since there seemed to be no discernible quality difference.
I’m not arguing that quality differences don’t exist among products, but you can’t assume that a higher price equals better quality. You must do your research so that you are not bamboozled by sleek design.
My gut sense is that no toaster made today will last 20 years.
loading....
As a point, I think its okay to consider one’s home part of the wealth equation if you account for that its value in average is probably 10% more than its actual market-clearing value, and 20% more in current bubble areas.
Talking and preparing for bad times by practicing good fiscal policy, keeping good health, and always trying to improve one’s position is a topic of merit during any economic time, good or bad. It is in the excess that it becomes worrisome.
I think some famous Greek said that virtue lies in moderation.
loading....
Sorry, didn’t mean to start The Great Toaster Debate! Actually, I agree that items these days aren’t made to the same exacting standards as they were 20, 30, 40 years ago. But also, having just read SkyMall mag on a recent airplane trip, there are just so many other fancy gadgets out there to lure us into thinking our ‘old’ toaster/telephone/TV/(insert item here) needs to go.
p.s. my toaster was free. It really sucks at toasting bread consistently, but I’ve kept it, because, hey, it was FREE.
loading....
Funding your IRA or 401(k) should not be counted in the savings rate because that money is designated for a specific purpose – retirement – and it’s not easily accessible in the event of a financial emergency.
loading....
escapee:
This person makes 3 times as much money as you. You lent them thousands of dollars being fully aware of how horrible they are with their money. I sure hope you wrote out a contract with them stating that they’d pay you $x/month or so.
I’ve learned the hard way. Lent money to family members who were horrible with money. Took them inheriting money over 5 YEARS later to finally pay me back. And they only paid me back after me nagging them constantly, and they had the nerve to get angry with me saying that me nagging them is annoying.
I couldn’t believe it. I was stunned for many days. I felt sorry for them, tried to help them out and this is how I get repaid? Finally they paid me off a few weeks later and I vowed never to lend money again to anyone like that ever again, family or not.
loading....
Wouldn’t the continually decreasing interest rate have to do with the decrease in savings.
I remember hearing that in the late 70s and early 80s that you could find savings accounts with 18% interest. I’d save a lot more if I got that return rate.
loading....
Every time I read this type of story, I’m grateful for the decision my wife and I made when we first got married. We currently save 17% of my salary. We only have mortgage and student loans. While we’re upgrading our home, and will be incurring a big jump in monthly expenses, we’re doing so at a time where we won’t have to change our savings rate and home prices are low*.
*relatively speaking.
loading....
For what it’s worth, JD, I don’t think this is gloomy. Far less gloomy than the financial news on the business page of the newspaper these days, that’s for sure!
On the subject of the 20 year toaster, I think it’s still quite doable (and even common) to get/have/keep household goods for that long. In our house we’ve got some kitchen goods (including our toaster, stand mixer, microwave, dishes and silverware) that will hit the 10-year mark this year–got them in the year we married and bought our first house–and they’re still going strong. We have quite a bit of stuff that predates these items, too: bookshelves, major furniture (bed, dining table and chairs, lamps).
We’ve replaced the mattresses and lampshades a time or two, though!
My husband got our TV when he was in college 20 years ago–it’s soon to be technologically obsolete, so I guess we’ll need to replace it. But it’s still working just fine for our needs. I’ve had my sewing machine for that long, too, and it’s still chugging along great (and I got it used–it’s a mid-60s, toothpaste-blue, all-metal Singer. I doubt it’ll ever die!)
I don’t think we’re alone, not by a long shot. The households of our good friends, the ones we’ve known long enough and well enough to have a sense of their household inventory, are along the same lines.
Maybe it’s freaky to think about having posessions for decades when you’re in your 20s yourownself. Get a little further along and you may be surprised how long some of your stuff has been with you.
(Dang, I’m feeling old on GRS today!)
loading....
two things: 1) I’m with the folks who say this isn’t a too-grim-for-GRS topic. If things continue as they have been in the US economy, there will be plenty more of these kind of topics to be discussed!
2) I wonder if “savings” should also include the intangible–stuff like social capital. During the depression, people didn’t just help their own families, there were many examples of people who developed community efforts to help their community members survive. Over the last 10 years I’ve three times given good friends a month’s rent when they were suddenly faced with an unexpected economic situation (divorce, unemployent, and an educational timetable that collapsed). I didn’t ask or expect to get the money back; these were not exactly gifts, they were “I see what I can do to help you” efforts. I’ve never had to ask in turn, but I do feel that these folks (or others with whom I feel equally close) are as much a part of my emergency fund as the actual funds I have.
I hope to never have to call on my social/friend/family network, but I wouldn’t be foolishly too proud to admit it if I needed help.
loading....
64 comments, and I’m surprised that no one has pointed out the most glaringly obvious problem with the “negative savings” statistic:
EVERYONE in this country who CHOOSES to work hard and earn an honest living, a full-time job, is being strong-armed by the government into “SAVING”:
YOUR PART (up to ~$100K): 6.2%
YOUR EMPLOYER, instead of passing on to you: 6.2%
TOTAL MADNESS: 12.4%
So everyone of us who is working hard to earn a living is paying at least 12.4% of our income into a forced savings fund called social security.
Folks, this statistic is meaningless. It’s up to us to figure out how to spend the 87% we have left, save and give properly.
loading....
On the subject of old kitchen appliances, I have a hand mixer from the early to mid 70s that I inherited from my grandmother. Works ok, I think the motor is a little slow, but it’s only for making cakes and pancakes with anyway.
loading....
Go to youtube,search for “the story of stuff”
As intro to it says it will “The Story of Stuff http://www.storyofstuff.com will take you on a provocative tour of our consumer-driven culture ”
pretty good—
loading....
The best way to cope with financial hard times, was best said, I believe, by Mary Hunt’s website:
1. Live below your means. Do not buy stuff you cannot afford.
2. Control your spending. Stay away from malls, online shopping, catalogs or other places that allow you to overspend with ease.
3. Reduce your expenses. Everything from the water you use to the gasoline you burn. Start tracking your expenses, then employ every possible tactic imaginable to cut some from every area.
4. Pay off your credit cards every month. If you are carrying balances, get those cards out of your possession so that you are not tempted to use them. Once paid in full, carry only one card with you and clear it every month as if your life depended on it.
5. Save. Save. Save. You need a good, healthy cushion of cash set aside to carry you through the unknown that lies ahead.
6. Pay off your home mortgage as quickly as possible. Once your unsecured debts are paid, tackle the home mortgage with a vengeance. This is the only assurance you will ever have for a rent-free retirement.
If you do all 6 of these things, you will recession-proof your life. That means you will be so well prepared, so financially fortified, that you will be able to not only survive, but also thrive during any coming recession.
loading....
Toasters. Argh. All I want is a toaster that actually makes TOAST, not warm bread. If it would last a few years, that would be good, too. Talk about sounding like a geezer, Angie: I can remember when toasters did make toast. Poor old bat.
The problem with the theory that a better savings rate and a national frugality binge will help the economy is this: the United States no longer manufactures anything of substance. What we “manufacture” is frantic, circular activity.
Our economy is no longer geared to manufacture and trade things of value and use. We spend our money on things that come in from overseas, but we don’t earn our money by manufacturing things to sell–most of us earn our money by serving other people in one way or another. It’s circular: an economy based on service produces nothing except a need for more service. It’s like cleaning house: the more you clean it, the more you have to clean it. And we also manufacture debt, the engine of our financial industry. When people stop buying junk and quit paying people to do things that they could do themselves (such as cooking and serving their meals), the economy is gunna grind to a halt.
When was the last time you bought a product that actually was made in America? Even items whose advertising imply “made in the USA” are largely manufactured offshore.
So you say all those swarms of new houses are products, right? Even the housing industry is circular: people no longer buy houses to live in for the rest of their lives. They buy a house so in three years or seven years they can buy a bigger house. It’s not a real product; it’s more like a service. A realtor once told me that after ten years a new house is considered “Old.” That’s outrageous! He admitted that in effect the new construction of the past twenty years or so is throw-away junk.
I’m afraid The Shrub is right, though probably not for reasons he understands: the economy has evolved to the point where if many of its citizens quit spending more than they earn, it will collapse.
loading....
I’ll weigh in on the ancient appliance issue. I am a serous case of “don’t replace what works”. My dryer is 23 years old, as is my refrigerator, my washer is 30+, my ancient pop-up toaster is 50+ (grandmother to mother to me). I could go on, but I think I’ve hammered on the point well enough. All these things still function, I see no reason to replace them.
I’ve always had some degree of frugality in my makeup, it just got a boost when I discovered GRS and some of the other sites linked from here. I still did expensively stupid stuff early in life, but I know people who may not live long enough to get out of debt. I expect to be clear of everything but the car note by year end if nothing else expensive happens. Of course, such stuff does happen now and then, as my original goal was aimed at four years ago. Oh, well.
loading....
If I include my employer’s match, I’m putting 29% (23% w/o the match) of my gross income toward retirement in a 401k and Roth IRA.
Seems as if some part of that should be considered “savings” especially since with the Roth, principal can be removed without penalty.
loading....
There is some incredible data and information in this post. I’m still trying to catch up when it comes to saving after years of not taking it serious enough. Obviously hindsight is 20-20 for me now, but I’m really kicking myself. This article just makes it that more evident the need to spend less and save more in general. Thanks JD.
loading....
J.D.,
This is my first time posting. I’ve been reading your site for months now, and it’s taught me a lot. I’d like to de-lurk a minute to encourage you not to shy away from “dark topics.” By bringing unpleasant subjects into the light, it raises more awareness, and I think it’s a good thing with this current economy. Thanks so much for your hard work.
loading....
JD — given that we’re probably in a recession, why is it “dark” to talk about it and how it could affect our lives? I lived in California a long time, so I’m used to the “must pretend to be happy happy” thing; I didn’t know that Oregon was afflicted with it, too.
loading....
I agree- we need to face reality here and prepare for it accordingly. Sometimes the truth is “dark”, but burying our heads in the sand about it isn’t going to make it go away…
a good article in today’s NYT about this:
http://www.nytimes.com/2008/03/21/business/21econ.html
loading....
David (Comment #64):
I’d agree with you if any of that money was actually going into any sort of “savings” account. Instead, the government is simply spending Social Security money just like it spends every other dollar it brings in; our current Social Security dollars go to pay back the people who were forced to “save” their money years ago.
As I recall, there was an attempt to convert Social Security into actual forced savings accounts, and people protested the “privatization” of Social Security. Not because it’s a bad idea, but because our current two-party system has become so polarized that nothing useful can ever get passed by politicians on either side of the fence.
loading....
I wish it wasn’t so easy for people to skew numbers. I read way too many people bashing my generation (I’m 24) because of our lack of savings. My husband & I save 10% of our gross pay into 401(k), 5% of our gross pay into our Roths, and 20% of our take home into a house savings account. In 18 months, we’ve managed to save about 1/2 of what we’ve made between everything. And we’re not the only ones who are doing so.
We’re DINKs. We can afford to save like that and still have our fun. No Wal-Mart runs or generic cheese in our house.
I think the government needs to find a new way to show the numbers, because these numbers (as everyone else has pointed out) aren’t showing the true reality.
loading....
I think it’s unfair to call consumerism and gadgetry the “Apple lifestyle.” One of the reasons I like Apple is that I have a 1998 beige desktop that still runs like a little tank… with OX X on it. Tiger, in fact. I haven’t upgraded anything to Leopard yet, or I’d probably try it.
Apple stuff is very pretty and moreish, but a lot of it is very well-made rather than disposable.
loading....
I think there is more to the problem than credit and credit cards (though I loathe how these practically serve as a new form of slavery for millions these days). If you look closely at the advertising/marketing done in the US, people are basically being conditioned to be good “consumers”. They are being quite literally brainwashed to believe that it is their right to buy whatever they want the instant the advertisers create the desire.
But more than that, people are being conditioned to constantly keep spending. They are told how important it is for the economy (and by extension them personally) that we all continue to spend, even beyond our means, to create jobs and stimulate growth that never really seems to trickle back to us. One ad I have heard on the radio has a fictional family talking (in a very obviously fake manner) about the virtues of some homebuilder’s “great deals”. The obviously fake little girl chimes in, spouting off some of the builder’s ad slogans and the father praises her by saying that she is “going to grow up to be a great shopper, just like her mother”. I seriously feel like I need to keep a barf bag in the car for the next time I hear that ad!
People are also being bombarded with the notion that they “need” credit cards to be happy and emotionally secure. An ad for a website selling secured credit cards asks the listener if he/she feels like a failure because they do not have a bank account or credit card. Since when did these become the measure of someone being a success in life? The ad very carefully does not explain out that everyone is automatically accepted for this miracle credit card (that they all but imply will do everything including improve your sex life) because you are basically giving them a chunk of cash, say $1000, then paying them an extremely high rate of interest (21% I believe) to use your own money!!! The advertiser even has the nerve to offer to “waive the fees” if you call “now” to in effect loan them your money at 0% interest and then pay for them to loan it right back!
loading....
Americans have become more productive and are, in general, earning higher wages
I’d like to see a cite for the claim that Americans are, in general, earning higher wages.
loading....
Savings need to start at an early age. Parents should encourage their children to save at a very early age and hopefully they will carry it into their earning years.
It’s amazing that kids out of college don’t take advantage of an employeers 401K right away. I guess they figure retirement is so far off that they would rather spend then save. What a mistake.
loading....
Seriously there is a serious problem with people saving money in this country. We can not get past the fact we need to have things that we don’t need.
It is just our culture that teaches us to live in the now. Not save in the now. Every time that we go out and spend money on something we don’t need it hurts us.
loading....