If you spend any time around the personal finance “blog-o-sphere”, you’re bound to encounter dozens if not hundreds of articles extolling the virtues of spending less and saving more. You’re also likely to have heard the message that “anybody can reach Financial Independence” if they really put their mind to it (and save 50% or more of their income).
Lately though, I’ve started to change my mind about some of these core messages that get parroted around the blog-universe, like so many birds repeating the same song the other birds sing…
Maybe we’ve been banging on that savings drum a little too hard. And maybe, (just maybe) we *shouldn’t* be saying Financial Independence is for everyone.
Perhaps we should be sending the message that financial independence is only for super-frugal weirdos that deprive ourselves of all the fun things in life.
What?!? Why would we want to send such a message?
The Paradox Of Thrift of course!
The Paradox Of Thrift
The Paradox of Thrift is this funky concept from economics that states — If we all choose to save more on a national or global level, aggregate demand actually decreases, which will in turn will lower total savings, not increase it!
Confused yet? I didn’t make this up. Some of the smartest economists in the world (John Maynard Keynes) came up with the idea.
If you think about it, it makes perfect sense — Everyone has a savings rate intrinsic to themselves, their culture, and their lifestyle. But if we think about savings on a nation-wide level (or global level), choosing to save a larger percentage of the total income that means less money is moving into the economy which means lower corporate earnings, smaller dividends and fewer jobs available for people to earn and save.
(For simplicity’s sake here, just assume savings are held in cash)
Meaning, we need to keep spending as much as possible in order to keep the economy going! If we don’t, our collective savings rates will rise, and the economy will suffer! This means stock prices in our retirement accounts would suffer too!
This paradox of saving makes me a bit worried because the U.S. savings rate has been on the increase for some time:
As of August 2019, the household savings rate in the U.S. is 8.1%, which is up pretty significantly from the record all-time low of 2.2% set back in June of 2005. There have been a few blips over the past decade, but generally the U.S. savings rate has been improving — Americans have been choosing to save more.
Clearly personal finance bloggers have been doing our jobs too well! We want people to spend more, not less! The economy needs more fuel!
Just imagine if the average savings rate in the U.S. was half of what it was today — That’s A TON more money being put into the economy that would drive profits higher and in-turn drive stock prices higher. Interest rates would also be higher (because of less money sitting in bank accounts), but so would dividends and bond yields as a result.
Big savers (like you and me), would do even better in a situation like this when everyone is spending more in aggregate. In other words: It’s good to be a saver, but it’s even better to be a saver when everyone else isn’t.
Consumption Is Wonderful
So I think I need to change my message here a little… I’ve been going about this whole Life thing all wrong you see. I’ve been denying myself all the wonderful happiness that can be derived from consumption! Learn from my mistakes! There’s just no real point in trying to save so much!
We should be out there spending and consuming as much as possible — in order to maximizing our happiness during our short time on this world. Life is short. Enjoy it while you can!
For example — There’s some really nice new cell phones coming out this fall that look super amazing. You should definitely pick one up so that when you’re sitting in that trendy coffee shop sipping your cold-brewed pumpkin spice mocha, YOU can look super cool.
While we’re at it, I need to mention that your 3 year old car isn’t looking as nice anymore. Hell, the dealership isn’t giving you free oil changes anymore so it’s practically time to trade-in that maintenance monster. This time around, maybe you should upgrade to something more luxurious…something larger and something more German. Like a Mercedes GLS, a BMW X5, or an Audi Q7. Those are really nice premium cars that’ll make you feel good and look good while driving them. Efficient little Japanese cars are for chumps and frugal weirdos.
Don’t have the cash for these things? Interest rates are super-low right now! Just borrow the money and you’ll be able to easily pay it back with your ever-growing salary. No problem!
Now, what about all this cooking at home stuff? Psshhaw! Cooking at home is for poor people with no lives who like to eat terrible food! Don’t eat beans and rice! Tofu is for weirdos! You should be eating at an exciting new restaurant every night of the week! Why waste your life cooking and cleaning when you can enjoy the fruits of your labor by eating a scrumptious meal made by a wonderful chef!
Oh, and speaking of homes — Buy as much home as you can! Having a ton of space is comfortable, and a bigger house is going to see that much more appreciation when time passes.
Spend it all! Right?
OK, OK, I’m only kidding! I don’t really believe people should be spending every last dollar. Saving and living within your means is a very good thing. But given what the Paradox Of Thrift tells us, is there such a thing as too much savings?
To a certain extent economies can run perfectly well on a whole range of savings rates, anywhere 0% to 50%. Globally we have countries (and economies) that function perfectly well within this entire spectrum of savings rates, so there’s really no need to try and trick people into spending more (or less).
History has also shown us that it’s also NOT a problem if the national savings rate moves-up a few percentage points over a decade like we’ve experienced in the United States.
For all those folks still seeking financial independence, you simply have to save more than whatever the average consumer saves. That shouldn’t be too terribly hard given the low savings rates in the United States or other parts of the world.
That said, promoting the idea of everyone reaching FI by saving 50% or more, doesn’t sound realistic to me. If everyone suddenly started saving 50% or more, it would put a huge dent in the economy! A recession (or depression) like that might take years or even decades to recover from. We don’t want that!
What we really want is a nice smooth-running economy with plenty of stable jobs, low unemployment, good education and social services, and plenty of excess money to invest in innovation. I think we’re pretty close to that ideal today.
And for all the frugal weirdos out there like me — Yes, we should definitely have the opportunity to save and invest our way to financial independence by saving large percentages of our income.
But let’s not kid ourselves and pretend everyone should be doing it, OK?
[Image Credit: Flickr]