Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Recession “Over”: Will you spend more now?

The economy appears to be improving. Last week the Dow edged a little closer toward 10,000—on Thursday it reached 9,850 before falling off to 9,784; then sedately rose to 9,820 on Friday. Our collective net worth, we’re told, has jumped some $2 trillion.  Not so many people are being laid off, or at least so we gather from the slight drop in first-time unemployment claims. In some states, a few folks are getting jobs: the government estimates the stimulus has created 139,700 jobs in California, 72,500 in New York, 36,000 in hard-hit Michigan. In Arizona, among the states that have taken the brunt of the real estate collapse, home prices moved up for the first time in two years, with the median cost for a home rising about $3,000, while rates on 30-year mortgages dropped nationwide to 5.04 percent. Maybe Bernanke’s right that the recession is over.

Boy. Two trillion bucks burning a hole in your pocket! What will you do with it? Do you expect to push the economy ever higher by spending some of that newfound money?

Do you think that as the economy improves, you’ll be spending more and saving less? Will Americans go back to their habit, so good for business and for the banking industry, of charging up more on credit cards and mortgages than they can afford?

Over at Get Rich Slowly, J.D. continues to ruminate about what he calls the “third stage of personal finance,” which has to do with personal values and long-term planning about money. It’s an interesting, if still inchoate, train of thought.

What portion of our income we spend, what portion we save, and how much debt we incur has to do as much with our concept of a “comfortable” lifestyle as it does with our circumstances. What, for you, is an acceptable way of life?

For example, CNN Money’s retirement guide posits that a 65-year-old with $500,000 in savings can withdraw $43,000 a year from savings until the age of 90. It suggests that if the same person continued to work until age 70 and maxed out her retirement savings, she could draw down $72,000 a year until age 90. And that doesn’t even count Social Security benefits!

Leaving aside the question of what the hypothetical retiree will do if she lives beyond 90, when she suddenly will be left penniless, this scenario raises a serious lifestyle question: Do you want to stay in the traces until you’re 70 years old? And secondarily, do you really need $72,000 a year plus about another $20,000 in Social Security—some $92,000 p/a—to be happy?

To my mind, the “third stage” of personal finances entails settling on what standard of living suffices for you and your family and deciding how long and how hard you will work to maintain that standard. SDXB, for example, decided when he was in his forties that he would jump off the treadmill. He made a conscious decision to live frugally and to cobble together a living from a variety of part-time sources specifically so that he would not have to trudge to an office every day.

He lives comfortably. He has no debt. He owns his house free and clear, and when he wants to buy a car, he pays for it in cash. He spent the entire summer traveling around the country and is about to take off for another few weeks. He dresses well (buying much of his casual clothing from thrift stores), has an active social life, and takes care of his health.

He accomplishes this because he distinguishes clearly between needs and wants. And when you come right down to it, one’s real needs can be fairly modest. I doubt if he spends much more than $24,000 a year.

His lifestyle, though, is a bit straitened for my taste. Even though I could live much, much more cheaply if I moved to Sun City, where he’s bought a house, I don’t want to live in Sun City. I like having young people around me, and I’m not especially frightened by the cultural diversity of a central-city neighborhood. Although the workload and costs of my present home are a little high, I like my house and want to stay here. And as for shopping in thrift stores, I simply haven’t the patience to plow through tons of old clothing in search of a few prizes. On the other hand, Costco’s $20 jeans do me just fine.

Clearly, to support my basic lifestyle I will need to spend more than he does. That is, I have a baseline set of expenditures below which I probably can’t drop without having to go hungry, let the landscaping die for lack of water, and get rid of the dog. Or…sell my home, move to Sun City, and pocket $30,000 to be used to help support me in bumhood. Accordingly, I have a baseline set of frugal values that I can’t or won’t violate, which entail living within my means and not running up debt.

The $43,000 that CNN’s hypothetical retiree plans to draw down from savings at the age of 65 is more than my net income. Add Social Security to it and subtract about 20 percent for taxes, and you come up with significantly more than I live on now. And in fact, even though my savings have not yet quite come back up to 500 grand, by the time I’ve cobbled together Social Security, a light part-time job, and a more modest drawdown from savings, I may actually net more than the Great Desert University is paying me. So, in theory, if more than enough comes in to support my baseline expenditures, I could adjust my baseline frugal values upward, into the somewhat less frugal range.

The recession has fostered a fresh vision of commonsense values among many Americans. As we’ve seen our jobs vanish and the equity in our homes melt away, we’ve come to realize that debt is a form of slavery—it forces us to keep working at jobs we hate, when we might take lower-paid but more enjoyable work or even be free to live without a day job. We’ve discovered that buying only what we need makes our lives simpler and easier to manage; that bigger or more is not necessarily better. Many have come to realize, too, that a frugal lifestyle is in many ways a green lifestyle: living smaller and lighter not only saves money, it’s socially and environmentally responsible.

That said, there’s a lot of pent-up demand. Except for the brief bump-up from the Cash for Clunkers program, people haven’t bought cars in two years. Growing families may need to move from two-bedroom apartments to larger digs; shrinking families or divorcing couples need to move to smaller places; unemployed workers following jobs to new cities need to sell or default on their homes and find new places to live. As the economy improves, there’s bound to be some spending to take up the slack.

But will we whip out our credit cards? Will we furnish the living room with a gigantic new digital TV screen? Will we head for the Armani rack the next time we allow ourselves to go into a department store? Will we reinstate the premium cable and that cell service that gave us half-a-dozen bell-and-whistle-laden phones? Will we borrow against the reviving equity in our homes to buy another boat?

My own plan is to continue living light on the land. If income rises, as appears possible, anything extra will go directly into savings, the better to support my baseline, third-stage personal finance value of never having to work another day job.

What about you? When things get better, what will you spend the loot on? Or…will you spend it at all?

Image: Worker. Public Domain. Wikipedia Commons.

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Author: funny

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  1. There’s too much good stuff here to comment on all, but thanks for featuring my fave sdxb. How did CNN come up with that number for withdrawals? It’s a far cry from the 4% you usually see.

  2. I was living a fairly frugal, no debt lifestyle even before the implosion. So actually, the recession (if I ignore the shrinking balance in my retirement plans – now made back more or less by additional input) has pretty much been a non-event for me.

    I’ve actually lossened the reins just a bit. Replaced my car on schedule, and am doing some home improvement projects while contract labor is available and priced nicely.

  3. Like the previous commenter, I was already frugal so my lifestyle didn’t change any when things took a turn. I live off savings accrued from my job (that I left to retire) and from rental income. The rent is still coming in, though I know it can be hit and miss what with vacancies and repairs. I’m slowly putting money into an index linked fund and cash accounts that are sheltered from UK taxes. At present since retiring I haven’t owed US tax, though I’ve owed a bit to OK and UT where my houses are.

    I like my lifestyle as it is; I’m not desparate to get out there and spend!