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Everywhere you turn today, you hear people talk about how much they need to save or how important it is to find a good deal on things "in this economy". They use phrases like "now more than ever" and "in these uncertain times". It seems to be a lot of doom and gloom.

Is there really a good reason that people should be saving more than spending right now? If you have a stable job, and a decent cash reserve, is it anymore "dangerous" to make a large purchase now than it was seven years ago? Is it really only because of unemployment numbers?

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5 Answers 5

up vote 27 down vote accepted

You ask a few different, though not unrelated, questions.

Everywhere you turn today, you hear people talk about how much they need to save or how important it is to find a good deal on things "in this economy". They use phrases like "now more than ever" and "in these uncertain times". It seems to be a lot of doom and gloom.

Some of this is marketing spiel. You may notice that when the economy goes south the number of ads for the cheaper alternatives goes north. (e.g. hair clippers, discount grocery stores, discount just about anything) Truth is, we should always be looking for ways to save money on goods and services we purchase. The question is, what is acceptable to you for your desired lifestyle. (And, is that desired lifestyle reasonable for your income, age and personal situation.) Generally speaking, the harder times are the more we find discounted/cheaper alternatives acceptable.

Is there really a good reason that people should be saving more than spending right now?

How much you are putting away is a personal matter. I can still remember my dad griping whenever he couldn't save half of his paycheck. That said, putting away half your paycheck may lead to a rather austere lifestyle. This, of course, depends on the size of your paycheck and your desired lifestyle. You could be raking it, living simply and potentially put away more than half your income with relative ease.

If you have a stable job, and a decent cash reserve, is it anymore "dangerous" to make a large purchase now than it was seven years ago?

Who knows? Honestly, no one. Predicting the future is a fool's errand. (If you are interested in reading more on this view point, I suggest The Black Swan.)

You mention the correct approach in this question. Ensure that you have liquid assets (cash or cash equivalents, i.e. money that you can draw on immediately and isn't credit) which covers at least 3-6 months of your necessary expenses (rent/mortgage, bills, car payments, food). (There is no reason that you couldn't try to increase this to 1 year, especially "in this economy.") You should also strive to have money available for emergencies that don't necessarily include loss of income. Of course, make sure you're putting away for retirement, as appropriate for your retirement goals. After that should come discretionary items, including investing, entertainment, the large purchase you mentioned, etc.

You should never use money that you may need immediately (5-10 years) for investing. This doesn't necessarily include the large purchase you are contemplating. For example, if you are considering purchasing a home, the down-payment may be one of the items for which you need money in the "immediate" future.

Is it really only because of unemployment numbers?

This is probably the big one that is the focus of everyone's attention. That said, the human attention span is limited. We have a natural need to simplify things. This is one of the reasons that we tend to focus on a few, hopefully important, things. However, the unemployment numbers are not that the only thing of concern. Credit is still pretty hard to come by these days. The overall economy is still hurting, even if we are technically no longer in a recession. There are also concerns about U.S. government borrowing, consumer spending, recent trucking numbers, etc. (It may not be obvious, but trucking is used as a barometer of economic activity. If there aren't as many trucks carting goods across the country, it probably means that there is less economic activity.) The headline number these days is unemployment, as most census workers have now been returned to the pool.

To answer the overall question, we should always be saving money, in good times or in bad. Be that by squeezing more value out of our purchases or by putting some money away. We should always try to reduce our risks, by having an emergency "cash" cushion. We should always be saving for retirement. Truth be told, it is probably more important to put money away in good times, before the hardships hit.

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Excellent answer. I also like The Black Swan. –  Chris W. Rea Aug 9 '10 at 16:45
    
@chris Thanks, coming from you that means a lot. I absolutely loved reading The Black Swan. I tore through it at a torrid pace. It was quite the eye opener. I had already learned the hard lesson that it wasn't just about the chance that something will go wrong but also the impact of it that matters; from personal experience in 2001. The book made be realize that trying to put a number on the probability of something occurring is fraught with issues and ultimately the wrong approach for most real world situations of interest. –  George Marian Aug 9 '10 at 17:05
    
+1 for "it is probably more important to put money away in good times, before the hardships hit." –  jjeaton Dec 15 '11 at 23:09

As you point out in your question your risk level is personal. If you really believe your job is stable there is no more risk. However the overall evidence is that most jobs are less stable, and if you do lose your job you're likely going to be out of work for a while.

One thing to consider though is that if you have planned on emergency credit in the past, that option is not really viable anymore.

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You can really believe that your job is stable, but it does not make it so. In fact, the most painful job losses are the unexpected ones. I considered down-voting your answer for the statement that there is no more risk. (There is always risk, we can only try to reduce it.) However, you make a good point about not relying on emergency credit. –  George Marian Aug 9 '10 at 16:54

I would add to the other excellent answers that another factor besides just high unemployment numbers is the fear people have regarding the "financial" aspects of the country, that is the value of stocks and the value of the dollar. When the economy is sluggish it means people aren't buying enough, therefore companies aren't making enough, therefore their profits are too low and people start to divest from them, and stock prices drop. Or even the fear of this happening can induce people to sell off shares.

The point is, people are worried "in this economy" because if--due to unemployment, low spending/consumer confidence--the stock market crashes again as it did in 2008/09, that represents a lot of savings lost, e.g. 40-50% of what one was counting on to retire with, particularly if you panic sell at the bottom. Now suddenly it's as if you had a huge robbery, and you will have to work longer into your retirement years than you'd planned. Similarly, if, due to monetary policy, the U.S. inflates the dollar, what one saved for retirement may not be sufficient. (These arguments are true for shorter periods than just one's retirement, but just taking that as an example).

So it's not just unemployment that is worrisome "in this economy". This said, I agree with George Marian that one ought to be careful and plan well regardless of the winds of the economy. I guess for most people (and companies), though, "in this economy" means they can't get away with the kind of carelessness they might have during a boom.

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It's all about risk. In 1990, expressing the idea of the US defaulting on debt payments would result in you being labelled as a crank.

Yet in 2011, the President and Speaker of the House played chicken with the credit of the United States, and have a date to do it again in December 2011.

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If you have a stable job, and a decent cash reserve, is it anymore "dangerous" to make a large purchase now than it was seven years ago?

If you're in that position, then no, it's not any more dangerous. The problem is that "in this economy" fewer people are in that position.

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