“What will it take to make Americans save more?” wonders Michelle Singletary in her latest column at The Washington Post. Singletary points to a recent survey that reveals Americans know they’re not saving but they just don’t care enough to change. (I recommend reading Singletary’s article via the Seattle Post-Intelligencer, where there are fewer ads and no pagination problems.)
What’s the root of the problem?
- Our homes are more expensive.
- We’re consuming high-tech gadgets like high-def television and high-speed internet.
- The costs of core components of our lifestyle — like health care and education — are increasing faster than inflation.
- We’re more willing to take on debt.
The floundering economy isn’t helping. “Slightly more than half of middle-class respondents said they’ve had to reduce their spending in the past year,” Singletary writes, “and they expect to have to continue these cutbacks in the year ahead.”
Why? Because nearly everyone (including the people I talk to in real-life) believes that we are entering — or have already entered — a recession. Americans my age (and younger) have never lived through a prolonged economic downturn. We don’t know what it’s like. We don’t understand the skills required to weather the storm. (Yes, I know the economy struggled earlier in the decade, but not like this.)
While the government may be slow to acknowledge the recession, the average person is already feeling it. Though the politicians may be turning a blind eye during this election year, Warren Buffett knows:
Asked by Germany’s “Der Spiegel” weekly whether he thinks the U.S. could still avoid a recession, he said that as far as the average person is concerned, it’s already here. “I believe that we are already in a recession,” Buffett was quoted by “Spiegel” as saying. “Perhaps not in the sense as defined by economists. … But people are already feeling the effects of a recession.”
Among the friends I talk to, this is certainly true. It’s even true at the box factory. Though I no longer work there, I keep in touch. Business has been slow. Very slow — not just for us, but all over the city. We’ve always said that boxes are a sort of “leading economic indicator”. When orders are down, I worry about what this means for the economy as a whole.
I also fear that the lack of savings among average Americans could cause real problems if the recession is lengthy or severe. If we, as a country, have no savings and are deep in debt, how are we going to manage?
Personally, I’m not feeling the pinch yet. Because I’m now working from home, gas prices aren’t affecting me. Food prices are shocking, but we’ve been eating out less, and soon our garden will be providing fresh produce. Meanwhile, I’ve begun to protect myself with an emergency fund and retirement savings. The future doesn’t frighten me as much as it might have in the past.
What about you? Are you feeling the effects of a recession? What changes have you made to cope with the current economy? Are you saving more now than you were five years ago? Or are you one of those who hasn’t found the will to change? Do you worry that you’ll have to dip into your emergency fund or retirement savings to make ends meet? If you’re not in the United States, what’s life like in your country? I’m curious how others are coping, and whether or not it makes a difference how much money you’ve saved.
In her article, Michelle Singletary writes, “I am not — like many people — bemoaning the economic downturn. I think that in one respect it’s a good thing. It’s what this consumer-driven, debt-laden country needed.” Sounds like a little bit of tough love. But you know what? She may be right.
Thanks to Tim and Kristina for forwarding these articles.
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If we’re in a recession, shouldn’t we at least have ONE quarter of negative GDP? Just one?
As it stands, the economy is still growing. Just wait until we DO get one negative quarter of growth. The media will have a field day.
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I’ve noticed my own food and fuel bills slowly creeping up over the past months. So far, it hasn’t affected me terribly. However, I know others who are really being squeezed by the increases, and there’s always the threat of job loss hanging over my head and everyone else’s. So I’ve been pulling back my spending for a while now, just in case, and I don’t see that changing anytime soon.
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I tend to agree with Michelle’s analysis that a slowdown may be what the country needs; however, it still is painful to experience regardless of your financial condition. I consider myself to be very responsible financially with a healthy emergency fund, retirement savings, and zero non-mortgage debt as a single, late-twenties management consultant. I haven’t planned on changing my spending/saving habits because I believe that I have been somewhat responsible all of my life. What does bother me a bit (and it may be another topic for another time) is the idea that all Americans are being penalized for the financial attitudes of a subset of the country, yet not everyone is treated similarly when it comes to assistance. This may be extremely selfish of me since I am not in horrible shape financially, but I used the Rebate Calculator on the IRS’s website to estimate my portion of the economic stimulus package and it came out to $71. My AGI is not that much more than the $75,000 cutoff for the full $600. So I am expected to shoulder an equal share of the economic slowdown; however, I can’t fully take part in the government’s ‘solution’ to jump start the economy. So I will take the $71 and fill up my gas tank a couple of times, and those dollars will ultimately end up helping to fund another glistening condo project in Dubai or a corrupt gas conglomerate in Russia – hardly the result that the US government was looking for.
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@Ron
You’re assuming the initial estimates, which are highly prone to error (on average, they change an absolute value of 2 percentage points from initial to final) don’t change. By getting hung up on an initial estimate number, you completely miss the more tangible point that growth has slowed down, inflation is definitely up, and the economy isn’t in great shape and some folks are going to feel the pinch.
That said, cutting consumption of things you dont really need is probably good advice anytime.
JD was wrong to prognisticate a recession, though. It is at least somewhat probable that we’re in the worst of it now.
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@JerichoHill
All I’m asking for is one quarter of no growth. Using the standard deviation argument means that we could be at 2.6% growth UP or 1.4% DOWN.
Just one quarter, just one.
The problems is that people associate slow growth with “recession” because we’re used to huge gains in home equity, huge gains in the stock market, and huge gains in business growth.
I’m asking for ONE quarter, but economists the world over agree that the definition of a recession is TWO quarters of negative growth. We haven’t even been able to get ONE (as if that’s something we should strive for).
As far as getting “hung up” on initial estimates, the media is hung up on oil prices alone as an indicator of recession, or people’s opinion (as opposed to data), or even whether a majority of CFO’s believe we’re in one (that was on Paul Harvey).
I’m not hung up on anything but the evidence and the data. Show me the data that we’re in negative growth and I’ll change my tune.
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Over the last 2 years we have eliminated our credit card debt, about $15,000. Our house payment is 25% of our tke home pay. Over the last 6 months we have socked more than a $1000 a month into savings. I recently just got offered a job in another city making more than I do now. Because f our savings I can take the job, afford to relocate and I dont have to sell my current home right now to make the move. So yes savings has given me the buffer I need in this economic downturn!
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@Ron is correct in his statement that we aren’t officially in a recession. We should be careful what we say and how we say it. Things like that have a tendency to be self fulfilling prophecies.
Now that we have that out of the way…
The economy is slow and is not doing well. Pundits and politicians aren’t helping things with their daily cry. While it is tough to live through, it is part of a larger economic cycle. It will hurt but we will live through it. The worse is past us unless the government does something stupid.
If you are smart you will learn from it. Increase your savings to increase your safety net. Eliminate debt to remove risk. Wait…Isn’t that personal finance 101? Dave Ramsey Baby Steps 1 and 2? Sorry, I’m a bit sarcastic today.
As for how it affects me…Very little. I sell to the oil industry so I’m in a boom time. It wasn’t that way several years ago. I found myself without an income the summer of 2001. It took several months but I found a better job in a strong industry. The ironic thing is that it was the best thing that could have happened. That could only be seen as hindsight, at the time it wasn’t fun. Unemployment was on the rise, add in September 11, and the job market was a mess.
If I had not been debt free and had a significant savings things would have worked out differently. While I didn’t enjoy the experience it didn’t break us. It opened up opportunities. It allowed me to move back into an industry where I was an expert. We came out ahead in the end.
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This topic has been on my mind quite a lot recently, not because I believe we are or will be in a recession, but because of the fiscal policies proposed by the Democrat presidential candidates, and I fully expect one of them to be in office in January. Both Democrat candidates propose massive tax increases for those Americans who are the likely readers of this blog.
When you couple those tax increases with the rising cost of fuel, to be quite frank: I have no idea how I’m going to survive the next 4 years.
Now, I am not interested in a political debate, and I don’t mean to turn this into one by bringing up the election. And, no, I don’t like McCain either and won’t be voting for any of the top 3 contenders, so don’t start thinking I’m a Republican – I’m not. Anyway…
I’m not trying to lay gloom & doom here, but here is what I predict:
- a Democrat will win the presidential election in November
- a willing Congress will go along with that president’s tax proposals, resulting in huge increases for the majority of GRS readers
- gas & diesel per-gallon prices will cross the $10 barrier within 5 years, probably sooner
- that higher fuel price will cause the costs of everything shipped to go up (airline tickets, but we already see that; FedEx, and we already see that; food; big box store items; literally everything)
I know this sounds trite, but we have real problems that demand real solutions. Some of those problems are:
- Social Security. The question is not whether it will fail, but when.
- Energy. We need a renewable, domestically produced energy resource.
Nobody in Washington wants to talk about Social Security, and when GWB tried to privatize just the tiniest bit of it, he was laughed out of DC.
Similarly, nobody in Washington wants to solve our energy situation. But the energy problem is not just with Washington: the problem is every couple or individual who needlessly purchases a 12 mpg Yukon instead of a much more efficient small car. Individually, the purchase of a larger or a smaller vehicle is not that important, but nationally it is a huge deal. If we all choose Yukons instead of Honda Civics, we end up requiring 3 times the fuel just to go the same places. However, all of us switching to Civics will not solve the problem – it will only delay the consequences.
And, no, I’m not a greenie. I can just see that worldwide demand for oil is surging, and that we here in the US&A are a huge part of that demand… though we are not really a huge part of the surge in demand – that is largely due to India and China coming online.
The part of all this that I don’t think most people realise or consider is that oil is used for everything: plastic (and everything is made out of plastic these days!!), gasoline, jet fuel, kerosene, Diesel fuel, the list goes on – just look it up. Google “petroleum processing barrel of oil” or something like that, and you’ll see what all comes from oil.
And don’t forget the cost of transportation for food. When I go to the grocery store, I try to buy produce that was grown locally – if I choose to buy things from South America or somewhere else similarly distant, then there is a tremendous amount of fuel used to transport those things to me, and that is truly a waste in fuel.
Speaking of waste in fuel (and resources in general), there are a few huge wastes of resources that drive me nuts:
1- junk mail. Think about the amount of trees that must be used to print the paper that we just throw away or recycle… and consider the amount of energy used to print that junkmail, and the fuel used to ship that paper to our mailbox just so we can throw it away or recycle it.
2- bottled water. Consider that all those plastic bottles do not recycle into water bottles, and consider the amount of fuel consumed to ship that bottled water all over the place. What a waste, especially considering that most municipal water is perfectly fine.
3- people leaving their car idling for 20 minutes. Do these people not consider that they are contributing to overall demand and higher fuel prices? Germans turn their engines off at stop lights so that they can save a thimbleful of fuel… yet many here in the US&A will idle their big SUVs for half an hour – what a total waste.
Sorry, I didn’t mean to make this so long… it’s just a topic that is near & dear to my heart.
To more directly answer the question at hand: I’m not sure whether I can save enough to survive the next few years. If our federal government doesn’t start adopting pro-growth policies, we very well may find ourselves in another Great Depression in the next 10 years.
As to what I have done, we have canceled cable TV ($45/mo) and NetFlix ($19/mo), and we refinanced our mortgage (saves us ~$170/mo). But that’s still not enough – we need to cut another few $hundred from the budget… not sure where that’ll come from especially if my taxes go way up as I predict they will.
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Similar situation here in the UK, with food, fuel and utility prices on the rise.
The most notable hits have been in petrol, which in my area is now £1.10 (roughly $2) per litre. My guesstimate is that I’m now spending about 20% more on petrol every month at the moment, which is leading me to do less driving (where possible).
Wheat and dairy products are going up too, but getting away from these increases is harder to do. A 6 pint bottle of milk cost me over £2 on Saturday, where previously it cost in the region of £1.75-£1.80.
I can’t remember what the UK Government says the official rate of interest is, but in typical conversation most people don’t believe it is correct. There is comparison between the Government’s rate of interest and the consumer price index, which people tend to think of as a more accurate indicator. The cynical point of view is when a product goes up in price the Government doesn’t include that in their inflation calculations.
On the plus side, it’s making me personally more resourceful. I’m no gardener, but I’m making better use of reduced aisles and clearance shelves.
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Daniel–excellent points. It seems most Americans, especially the current generation consume for the sake of consuming. I read a great quote about irresponsible use of resources. Goes something like this “Americans won’t pay attention until it interferes with their tv reception”
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What will it take for Americans to start saving?
How about a decent rate of return on savings and not taxing interest paid on savings as normal income?
WTH does a hedge fund manager get preferential tax treatment on his income from an ordinary mortal trying to save for their future? Smarter to have HELOC debt that you can write off against your W-2 wages.
*THIS* is why no one saves anymore, and it’s not an accident how we got here.
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Recession, huh? Sounds like I need to pick up a copy of the “Get Rich Slowly – and live through the apolcoyptic recession” book. You wouldn’t leave me hanging, would you JD?
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Ron, the last recession was “called” the same month that it “ended”. Using the defintion of 2 neg Q’s GDP, the term recession is backwards looking.
As you know, the NBER “calls” a recession. But did you know that, according to the NBER, “[a] recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.” http://www.nber.org/cycles/recessions.html
By their own definition, the US is in a recession.
As to the topic of the post: I had been doing a good job saving more over the past year, but food and energy costs have significantly impacted my ability to save consistent with the last 12 months. I don’t care what the gov’t says inflation is, my food and energy costs have risen through the roof. I have made changes in my discretionary spending as a result.
To be sure, oil has risen so fast, that companies have not been able to pass on their increased costs fast enough. I predict serious cost increases over the next 12 months…which will reducing my monthly savings even moreso.
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The perceivable differences the economic downturn has made in my life are: (i) less bang for my buck in my savings account, (ii) sky-high rent, and (iii) things are slow at work, and I’ve been made aware that money’s tight.
One positive is that I was able to purchase stock when the price was a bit lower than it had been, say, 6 months ago.
Other than that, I live in a city where my commute is via public transportation, and the price of a pass has held steady. Food costs (for me) are about the same, including going out to eat.
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The top of this post asks, in reference to large consumer appetites, higher prices, and high debt levels, “What’s the root of the problem?”
The answer to the question is purely human emotions, the most destructive of which are fear, greed and complacency. These are all symptoms of a disease called, lack of self-awareness.
Without the timeless virtues of simplicity, moderation and contentment, we fall victim to our own human excesses.
“Moderation, which consists in indifference about little things, and in a prudent and well-proportioned zeal about things of importance, can proceed from nothing but true knowledge, which has its foundation in self-acquaintance.” ~ Plato
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I’m not feeling the effects of a recession. Sure I notice prices going higher. But my house payment is only 14% of my income. I own my 2 fairly fuel efficient cars. We have job security, and plenty of cash in the bank and investments. I have no other debt and no plans to obtain any in the near future. But alas, I watch a reglar 25 inch TV and don’t own a laptop (just desktop). Also my home is only 1500 sq. ft, but somehow we make it.
But I am concerned about inflation – it is driving up the price of everything. We are certainly in a period of increasing prices. It isn’t stagflation like the 70s, it feels different.
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Ron,
Estimates don’t work that way. By holding to an arbitrary rule, based on an estimate that isn’t wholly reliable, you’re committing what Diedre McCloskey and Erza Klein would call the fallacy of statistical significance. A good many economists are guilty of such.
Further, ECONOMISTS do not use the 2 quarters of negative growth as their definition of a recession. That is what is called the newspaper definition. The ECONOMIST’s definition is more clearly explicated by the NBER Recession Cycle Dating Group.
I should know. I am an economist.
EDIT: Well, obvious got to it before I did. Good job obvious.
EDIT2: To Daniel: SS didn’t need to be privatized, its a very efficient government organization. It would be fine if Congress hadn’t dipped into its funds to pay for shortfalls. Now if that’s the justification for privatization, that’s more of a damnation of a government that can’t spend as much as it earns, not an indictment of a government office that does a pretty good job with what it has.
And let’s leave the fear-mongering of “another great depression” aside. This isn’t nowhere near as bad yet as the 79-81 recession, and that’s a long ways from a great depression.
I would argue that if you’re living a GRS lifestyle, youre pretty secure.
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Dave Ramsey has been on the Today Show, Larry King, and of course his own TV and Radio shows talking about the recession – or lack thereof – in the USA. My favorite quote: “The news media has predicted 38 out of the last 2 recessions” – as in, they’re pretty bad about predicting recessions. They don’t have a clue. “The Sky Is Falling” news sells a lot better than “Everything Is Just Fine” news.
As for what the average American can do? Some basic things that JD writes about on this site: Get out of debt, spend less and be frugal with purchases, save money for emergencies and retirement.
Do you really care if the sky is falling when you have a helmet that you got on a good deal?
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Looking at our local economy (which is anchored by a state university which is considered pretty recession proof) we do see people struggling, so we do believe that at least locally there are problems and so we have increased our efforts to buy locally — for example, we spent $40.00 at a local gift store rather than the same $40.00 on the target web site where our niece was registered for a baby shower. I think we are also scaling back in almost unconscious ways, by not putting ourselves in buying/spending positions.
BUT, as others have noted, it is very difficult to control some spending; if you have health care needs they have to be attended to, and it’s difficult to respond to energy and food price increases; what one can do to save usually doesn’t equal the actual increases.
I also wonder whether as people try to deal with their own situations there isn’t a spiralling effect — certainly it appears that the downturn in the housing market affects lots of other industries and so there are more and more people who aren’t directly involved but are suffering from job loss and slowdowns and their changes in buying habits affects yet other businesses and other people…
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Savings will become essential to the economy as the dollar continues to fall and foreign investors begin to reduce their investments.
Businesses need capital to grow, which they get from savings. Today, businesses are funded by savings from foreign nations.
China has a savings rate of 40-50%, which is funneled into the US as they buy US Treasure bonds and US Stocks. As the dollar drops, the return on dollar based assets is deminished, which greats better investments in other nations.
We needs to increase the saving rate to help the economy and support the dollar.
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healthcare has officially hit 30% of my annual income.
i’m this close to operating our household budget in the negative. scares me to death.
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I couldn’t possibly comment on whether or not there is an actual recession. I can say, however, that I work part time at home, which is stable income, but my husband’s company has made all sorts of changes that are really affecting us. They have cut our medical benefits (in 2005 it cost us $750 out of pocket to have a baby, if we have another this year it’ll cost us $11,000), cut bonuses to almost nothing, and cut “perks” like paid lunches (he travels 4 days/week), and raised what they pay for mileage by just $.02.
Add that to more expensive food and gas and, yeah, we’re feeling the pinch. We’re getting pinched hard.
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@Maya
I think you are right, Maya. Americans ARE “feeling the pinch”. I work for a major cellphone service provider, and there has been a noticeable increase in the number of callers reducing their cellphone service, or cancelling it entirely, early termination fees notwithstanding.
I really don’t care what the pundits say about whether or not we are in a recession. Folks ARE cutting back due to rising prices overall. The question was, “Are you feeling the effects of a recession? What changes have you made to cope with the current economy? Are you saving more now than you were five years ago?”
My answers are 1. Yes; 2. I’m driving less, purchasing less ready made and convenience food, cooking more and going out less; 3. No; 5 years ago I was in a much higher paying job, and was saving via a 401k. Other than that, I was spending all my disposable income. Today, I am just trying to get by on what I make, and barely doing it.
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I’ve been at the mall twice this month. As I searched and searched for parking in a 99% full lot, my thoughts were: “What recession?” I bought a mattress set yesterday for $1000 – and had to wait 40 minutes to be rung up – that is how busy it was! (I didnt give up because it was a great sale price and I was sick of shopping around)
I lived in N.Cali in the early 90s and I felt a real recession. That is how I got into my industry – healthcare – because I thought I never wanted to live thru months of joblessness again. I had no real plan – I moved there at 22 fresh out of school.
I read an article a couple a weeks ago about SUV owners trying to sell their vehicles and there were no buyers. I groaned – because much of the America I see is that – until your average Joe encounters an economic problem (such as gas in this case) – there are no thoughts about driving a SUV as much as they like. Whereas, when gas was still affordable I was always thinking that I did not want to waste the money or resources for a senseless vehicle (to me, I know some ppl “need” one). My hope is that a large number of people ‘wake up’ and live in a way that is not wasteful – whether it is cash or resources. Suffering would be worth it in the long run if we could culturally get back on track.
Most of the time I try to live consistently under my means and whatnot. I do have trouble saving the big chunks for retirement and whatnot but I do it with a ‘marathon’ mindset. My net pay isnt that great (live in a high tax state) and with everyday prices up on things I’ve budgeted less for liquid savings and ‘blow money’. I’m still reeling from making a $1000 purchase yesterday – but I wake up in pain everyday from an old mattress that actually sprung a spring last week. I planned for it and am using my stimulus check but dang! it still hurts to fork over that kind of money. Boohoo.
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I’m in Toronto, Canada and can tell you – whether the textbook definition of recession is met or not – things are definitely a little tighter. Gas is selling for a record high today (finally topping the record set after Katrina). Food is up as well, and although I don’t keep careful track of what costs what at the grocery store (something I may start doing) I can tell you that I always buy roughly the same things and this time last year I was ALWAYS well under my allotted budget and now I’m thinking I may have to increase that budget just to keep up.
Everyone I know is feeling the increases and a few have made the choice not to travel this summer or at least not as far or as often.
As for personally, it doesn’t affect me all that much. I don’t drive an awful lot – the price will have to go north of $2/l before it really starts to become an issue for me (the average price on the news this morning was $1.29/l). The food increase worries me a bit but so far not a huge issue either, if I have to reorganize in order to increase the food budget I have enough wiggle room to do that. I did plant a vegetable garden this year for the first time to try and offset some food costs and I’m really enjoying it as a hobby as well. If my yields are high enough I’ll be canning my own tomato’s for winter as well to save all year, we use a lot of tomato’s and they are one of the things that have gone up, apple juice is another that I’ve noticed particularly. My job is just about as stable as a corporate job can be – never say never, but I’m not really worried.
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to comment on Kim C’s comment and ppl scaling back on their cell plan – I sometimes wonder if consumers go into a panic, cut back sharply (even though they can truly afford it) , and that causes a ‘recession’ or at least a downturn.
Luckily I try to stay close to spend on a need only basis – I dont have a whole to give up (except maybe my $11 cable bill, but with TV going digital in 2009 I’d have to get it anyway).
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you just have to make sacrifices
i drive (a lot) less now.. i don’t take my monthly vacations to tahoe or reno anymore.. i wanted to drive to yosemite over the weekend.. but had to stay home because of gas prices
i’m into car mods.. but i’ve kept my car pretty much stock because i know i need to have a little cushion with my emergency funds.. i also have the new car itch.. but i know now is not the right time to be taking on unecessary debt
i hung out with friends for the first time in a while this weekend.. it was a great way to catch up with old buddies.. hang out.. eat.. drink.. and best of all.. it was free! plus it is good to know that you’re not alone in the struggle.. all of us are going through it (the generation x crowd).. the late 20′s / early 30 year olds still living at home with mom and pops because we have no other choice.. this is a unique generation and i know we’ll find creative ways to survive.. and make things better for ourselves.. i have faith
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FW – I can’t help but laugh when I see news stories of SUV drivers who are paying $100+ at the pump and talking about how they’ve had to give up going out. They’re the same ones who tailgate me, cut me off and zoom by doing 15 over the speed limit. Meanwhile my little sedan is driving 5 miles under the speed limit at 65 because its more fuel efficient. I’ve always been disgusted with gas guzzlers, they cost a ton to buy and they cost a ton to fill even back before gas was $2 a gallon.
to JD – the “recession” hasn’t affected us very much because we started doing a self debt reduction program earlier this year. With our budget in check we spend less and have more. The $20 extra per car to fill up these days is nothing compared to how much we aren’t spending. Our only downfall is that I’ve taken a new job and our house is going on the market. With house prices down we are forced to do a shortsale as we have barely any equity in our house in 2.5 years. I’d love it for you to do a piece on real estate…
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@FW: Funny, my wife said the same thing this past weekend on our trip to Costco and the local mall. People everywhere.
For us, the slowdown of the economy has had little to no effect on our day to day. However, we’re fortunate to “always be prepared”. I did calculate the cost savings of purchasing a fuel efficient auto in place of my Dodge 1500 (paid for), but it only begins to be a cost savings if/when gas hits $5/gal and stays there for at least 3 years.
I don’t currently *believe* that will happen for various reasons, both politically and economically motivated, but I may be changing my tune based on the first 100 days of the next Presidency.
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@Marty:
I sure hope you are right and I am wrong about gas prices. Time will tell.
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I’m fortunate to be single, childless and in my mid-30s (well, fiscally fortunate, maybe not so in other ways). I’ve been debt free for a few years with a substantial emergency fund and slowly-growing retirement, and I take public transport to work and only use the car for groceries, errands, or weekend trips.
I honestly haven’t noticed much pinch personally, although my roommate and I are cutting back on our cable service, phone, and electrical use just because they’re moves that make sense.
I have noticed it at work, where relentless expense control has removed most of the perks out staff use, salary control has resulted in mass exits by people who haven’t gotten raises, and for the second year running, we’re looking at substantial headcount cuts to keep expenses down. I work in HR and am unlikely (knock wood) to get cut, but I have to be there to deliver the message to those who are. So that part has affected me personally.
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JD,
“Among the friends I talk to, this is certainly true. It’s even true at the box factory. Though I no longer work there, I keep in touch. Business has been slow. Very slow — not just for us, but all over the city. We’ve always said that boxes are a sort of “leading economic indicator”. When orders are down, I worry about what this means for the economy as a whole.
I also fear that the lack of savings among average Americans could cause real problems if the recession is lengthy or severe.”
If people save more, and thus don’t spend money on needless ‘stuff’ then won’t that also trigger a recession of sorts? If people aren’t buying as much, then business will be slower, and people will be laid off and/or business will shut down because the money isn’t coming in to cover expenses.
Or else the world needs to cut back on the babies born in order to reduce the population to reduce demand. There wouldn’t be a huge number of people unemployed by work shortages.
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I agree with Idaho-spud (msg. 11). Twenty-plus years ago, credit card and other consumer debt interest was a federal and state tax deduction. Once the tax law was changed, there was a several-year phase out of the deduction and I clearly remember the banks starting to push HELOCs soon after as a way of buying stuff on credit but still being able to take the interest deduction on your taxes.
As for savings, I’m saving more now than I ever have. I got out debt except for my mortgage last October, and my mortgage payment is only 16% of my net. Yes, gas and food and other items are going up, but because there’s such a large spread between my net and my expenses now, it’s hardly noticeable.
The elephant in the room – that I’ve yet to hear any politician or media talking head address – is debt. That’s the true underlying source of the “squeeze” for many/most of the middle class.
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@ Mr. Obvious and JerichoHill
Thanks for setting me straight. The sky IS falling.
I should have know it, I’m an MBA. LOL!
Seriously, all economic thought is backward looking. It’s the nature of the beast. If economists could accurately predict the future, they would be rich beyond their wildest expectations and would sell their ideas on late night infomercials…or at least to a dot org think tank.
I believe this current overstatement of our economic problems is just part of the political season (gasp!). Isn’t it just a little odd that we’re on the edge of economic ruin during a presidential election? Of course, the candidates have ALL the answers.
This isn’t a real recession though. Only two sectors are really dragging things down: housing and the financial sector. Removing these two sectors from the calculations shows that business profits gained 15.9 percent in 2007-4 and gained around 12.0 percent during 2008-1. The strength of ‘core’ profits and of the whole US economy in the throes of the worst credit crisis since the 1930s is impressive.
But you’ll never hear that on the evening news.
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I haven’t had time to join in the conversation here, but I wanted to let you know I’ve been following along, and find it interesting. I agree that the media is far, far, far too interested in “the sky is falling” type news. And I have no idea about the technical definitions of recession, etc. But like Buffett in the quote I cited, my own anecdotal experience is that people are beginning to feel pinched in a way that I have not seen in fifteen years. What’s more, they don’t seem optimistic about the economic future. Maybe it’s just the crowd I hang with, though.
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My understanding of recessions is that they are more accurately pinpointed in retrospect than during the time period when you are actually in them. So, debating whether we are in a recession or not is probably something best left for future dates when all of the data identifying such an event can be studied.
What can be pointed out readily is the daily travails this economic slowdown is causing to many working class and retired Americans. Whether it is the lowering of interest rates to bail out banks or to prop up Wall Street, many of us have seen our safer investments (money market accounts, bonds, CD rates) drop in earning potential. This is serious for retirees who depend on their interest rates and dividends for current income. Coupled with the obscene rise in fuel prices and the related rise in food prices and the loss of the dollar’s buying power, it’s a witch’s brew of bad times. So the fact of the matter is, it doesn’t matter if you call it an official recession or some other euphemism to obscure the seriousness of the current state of affairs, it’s not a good situation to have to deal with.
Oh, and to the people who seem to think that seeing lots of people buying things at the mall is a sign that things aren’t as bad as they seem: I would not judge the state of the economy by the spending habits of people who have been addicted to credit and ultra consumerism for decades. Drunks don’t give up the bottle in a day.
And finally, to the people who say it hasn’t affected them personally… consider this: has it slowed down your savings some? Maybe having $25 less to bank per week. You all know how that $25/ week can affect your long term savings when compounding is taken into account. Just a thought.
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I saw the writing on the wall last year and started saving hard in November. We’ll be fine, but I’m worried about my fellow Americans who don’t know how to defer instant gratification and will go into debt to finance lifestyles that they can not afford.
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My husband and I have been doing fine this year, but it doesn’t feel like things are ok. I don’t go by what I read in the news, but what I experience, and from my experience it is worse than what the media says. My father has always been a a workaholic self-sufficient small business owner. Even the instance he ended up owing alot of money about 20 years ago he dug himself out of that hole with alot of hard work, paid back all debts and owned his own business (restaurant) again. Well, until now. Restaurant business had fallen off in the past couple of years. Rather than selling his restaurant, decides to use whatever money he saved and using his town home as collateral, to open another restaurant, hoping that would do well enough that could be his mainstay, and sell the other restaurant. Well that might have worked in the past, but there was a good reason why his first restaurant wasn’t doing so well, the economy. Needless to say this was not a good time to open another restaurant. He had to close the second restaurant 6 months after he opened it, and due to the losses he sustained may have to sell his car, his townhome, and possibly liquidate his first restaurant just to pay back debts. So my Dad is faced with at 74 no job, no assets, no retirement savings. Likewise my 3 siblings are facing unemployment as they work for him, with yep, you guessed it no emergency savings. They have actually taken pay cuts to try keep the restaurant going.
My mother is 65, but as she only receives $500 a month from SS, works part-time. She confided in me about a month ago she had taken out a heloc, originally to fix up her house to sell, and ended up using the money for basic repairs (broken pipe, hole in roof) and basic expenses. The heloc is coming due in 2 years, the house is not in sell-ready condition (plus it’s value has declined) and she doesn’t even have the money to pay her property taxes.
My family is not perfect; they have made many mistakes, but their not being prepared financially coupled with the crappy economy and rising costs have made for them, and many others “a perfect storm”.
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I certainly agree that Americans need to work on spending less than they earn. We are pushing toward the same set of conditions that caused the Great Depression.
I also agree that a true recession could be in our near future. However, I’m not so sure we are facing that situation just yet. My father is a self-employed aeronautical engineer. He is certified by the FAA to approve designs for airplane modifications. His work in this industry means he is usually one of the first to be affected by any economic struggle.
Business is not slow for him right now. In fact, he has been so busy lately that he had to work for a few hours yesterday – Memorial Day. We may be on the verge of a recession, and there are definitely a few markets that are really struggling, but to say that we are in the middle of one is, I think, premature.
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The secret has been published on this very blog: Stop buying crap.
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I just yesterday signed up to put 15% of my pay into deferred comp. This will be in addition to the $100 a week I put into ING Direct for after tax liquid savings.
I have no debt except my house and I’m paying an exra $125 a month on the principal.
Right now, I’m looking for a really good foreign index fund to invest that $100 bucks a week now that I’ve got my 3-6 month emergency fund.
My mom and dad dragged me to see Dave Ramsey when he was in town. I thought to myself “This dude is totally preaching to the choir.” But since that night I’ve completely turned my financial life around. Just in time too it seems!
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Oh, and one more thing to those people who say they haven’t felt the effects of the current economic conditions: perhaps you are like the frog in a pot of water to which heat is applied over a long period to bring it to a boil.
Personally, the savings goals I have set for myself are becoming more difficult to meet, which is particularly depressing since I have finally rededicated myself to a more measured lifestyle only to watch as my sacrifices to get to this point are suddenly approaching inadequate. I have tried to balance a robust savings plan without being miserly. I am not struggling yet, as I can always scale back on my savings goals to meet the rise in prices of food and fuel. But if things continue the way they have of late, this is certainly going to have an adverse impact on my ability to meet the long-term goals I have set.
Here’s a tip for you all if you haven’t done so already: stock up on food! Considering the rate at which food prices are rising, you’ll probably get a better return on that than if your money is in the bank.
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@Mike
Yeah, I tend to agree with you – the world needs to cut back on the baby-making (especially in poorer countries). But THAT’S an argument that people get REALLY emotional about and trot out bizarre statistics to prove their point that everybody should just keep on propogating their gene pools….
But yeah — totally makes sense: Fewer people, fewer resources needed. It won’t happen, though.
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it’s hard because we often don’t build savings into our budgets (if we have budgets!). i’m just getting to the “savings” goal, and i’m already 30!
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America needs a Crap Detox. Then a recession wouldn’t matter either way.
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JD, I usually really like the articles, but I think saying “(Yes, I know the economy struggled earlier in the decade, but not like this.)” is just way out of line. It’s completely baseless. I think of the article was that most Americans are already stretched too thin as it is and what will happen if it gets worst. But making statements like the above makes me (and presumably others) miss that salient point.
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when everyone is saying we are in a recession, the sky is falling, and constantly getting slammed by negative info, of course people are going to feel down. despite all the sky is falling, the job market is still steady.
i’m with FW, i’ve been to the malls the past month, people driving in suv’s by themselves, no one car pooling, and my wife and i are constantly saying what recession where is the pain everyone is talking about? the restaurants are full, the malls are full, it was crazy this past weekend, and the weekend before that, and the weekend before that etc. maybe everyone is using their rebate checks, but who knows.
on the flip side, i was waiting at the very long atm line, there were 8 people in front of me. only 2 people were able to get cash out of the machine (i think 1 tried two cards, though), while 6 attempted to use at least 2 cards, but went away without cash. my wife and i amused at the situation, because what are people thinking that overnight somehow more credit appeared on their card, or money mysteriously showed up in their checking/savings accounts?
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A few things I’ve started doing directly because of the economic pinch:
*Almost always driving at 65 MPH or below
*Parking the car and walking in at fast food joints instead of taking the drive-through
*Combining trips–doing as many tasks as I can on each driving trip
Basically, I’ve started regularly, consciously modifying my driving habits (which I should have been doing all along) to save some money to help counteract the higher gas prices.
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It’s not a black/white picture. Both of the following are true:
1) Americans are too materialistic and buy too much stuff. We love to eat out and buy status symbols.
2) Health insurance is skyrocketing and people are paying more and more for it. Housing prices became inflated in many parts of the country. This is dropping a bit, but not enough for us responsible renters who didn’t get in on the financial irrationality. Gas prices are very high. Even if one limits driving, it still eats in. Food costs too. I’ve already gone to all generic. What will I do if it continues?
Personally, my hubby and I are in a good place. We’re living on one income while he pursues a higher degree. I know we can do this now. Also, we have savings and my job is pretty secure. So I’m fine. But yes, I worry. Not everyone feeling the pinch is irresponsible. I don’t buy much.
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very insightful article. I personally have been feeling the affects of the recession. I drive to work and notice that food prices are goin up substantially (I don’t grow my own produce).
I believe the lack of interest in savings comes from the generations that we grew up with. Each generation is vastly different. Most baby boomers have been the backbone for this society. Initially they spent a lot and saved little. Most of their savings were thought to be social security. Now that they realize that we are seeing greater inflation and healthcare costs. Our generation(meaning generation X and Y), who have been taught by our parent’s also want to save less and spend more.
Now that people are seeing a tighter crunch in the economy and debt is getting out of control people are learning to spend less. Most people aren’t saving now because they are so busy paying off debt that they are trying to get rid of. The recession will also hurt people as jobs get cut and the overall economy turns downward. I just hope that I am able to pay off my debts and begin investing more towards savings soon.
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