Does The Economy Affect How You Save Money?

by Silicon Valley Blogger on 2008-09-2324

Does the economy affect how you save money?

Things must be bad when the wealthy start to tighten their belts. It appears that a lot of the rich have decided that their normal spending habits can no longer go on unchecked. With the market having sliced their asset base in a big way, some of these rich folks are having to make adjustments.

I found a rather amusing story in the Wall Street Journal about the rich deciding to economize because the economy’s been on shaky ground. Here are examples of how the rich are economizing right now:

  • Postponing a nose job for a child.
  • Cutting down on nanny costs from $1,200 a week down to $750 a week.
  • Having second thoughts about purchasing a $25 million megayacht.
  • Deciding to go with a cheaper $1,200 Botox treatment in place of a planned facelift.
  • Slashing the jewelry budget in half, from $50,000 to $25,000 for an anniversary present.
  • High end jewelry stores needing to offer storewide sales, with discounts of 25% off.
  • Greater interest in selling off trinkets like jewelry and gold watches.
  • Chasing down discounts for Armani pin stripe suits because of “shaky” finances: $500 is a superb deal at 80% off!

Is this for real? Because I don’t see this as economizing at all, at least from the vantage point that I have. Well, it’s all relative, after all; even after downsizing and cutting back, a lucky few are still living a life that is way beyond anything we can imagine having.

savings philosophy, savings goals, savings approach

This story made me reflect on a few things. One thing it made me realize was the effect of wealth on most people. It’s human nature to expand our appetites along with the expansion of our incomes or net worth. If you used to make $100,000 and live on $50,000 a year, but find yourself one day making $400,000, would it be any surprise if you’ve gradually expanded your budget accordingly? How many people would actually still live on $50,000 a year even after reaching incomes that may be quadruple what they originally earn?

A lot of true frugalists will say that no matter how much their income or asset base has increased, they wouldn’t change their ways. Their spending and saving philosophy is quite conservative, which you’d label as the approach taken by “The Millionaire Next Door”.

What’s Your Saving Philosophy? Your Spending and Saving Profile

This made me ponder the variety of spending and saving approaches and profiles that exist and how we’d fit in that mix. Which one do you find yourself agreeing with?

#1 Savers who develop a variable budget based on how much they make.

Do you determine how much you save based on the amount of money you make? You’ve probably heard of that rule: save 20% of your income. This is the kind of approach that many people take: they peg their savings onto a given savings rate (say 20%) so that as their income increases, their expenditures (and savings) grow proportionately. They’ll save more as they earn more, but they spend more as well. More aggressive savers will try to increase their savings rate (above that initial 20%) when their disposable incomes rise, but it remains to be seen if they can succeed in committing to higher and higher savings levels. Why? Because it’s way too easy to give in to temptations when you know you can afford them.

#2 Savers who stick to a fixed budget no matter what.

How about if you work backwards: determine your expenditures and stick to a budget based on those expenditures? If you stick to a budget, then as your income grows, your savings rate will keep growing over time. If you’ve restricted yourself to spending $50,000 a year to live on, then if you keep to this budget regardless of how much money you make, your savings can grow fairly rapidly.

#3 Savers who react to market psychology.

When your savings and investments are tied to the markets, do you find yourself changing your spending and buying patterns according to how well or poorly you perceive things to be financially? I do. During the dot com era, I confess that we got “spoiled” into thinking we could afford certain things that today, we’d be more uncomfortable paying for. And we did end up purchasing some big ticket items that we may be enjoying now, but we feel somewhat guilty about, given how the market has turned on us in recent years. That said, we’re much more conservative with our spending and we’ve cut costs quite a bit over the last two years based on our financial circumstances and in reaction to the current state of the economy. Are your spending and saving behaviors affected by what goes on in the economy?

#4 Savers (or spenders) who follow the lead of the Joneses.

Some people they take their lead, not from their personal financial situation or the economy, but from those around them. They spy their friends, family or neighbors with the newest toy, and they’re eager to outdo them with something better, shinier, more expensive. A lot of the wealthy are this way because they’ve got the money to burn.

Note that I didn’t mention the very popular “Pay Yourself First” savings method in this list because I don’t consider it a “philosophy” but rather a “strategy” that you use in conjunction with any of the views I’ve mentioned above.

How The Economy Affects How I Save Money

It dawned upon me that although I’ve always believed that I’m fairly frugal — as one who follows a conservative spending philosophy — I haven’t been quite conservative enough.

For instance, although I don’t spend much on wardrobe, appearance, travel or food, I’ve dedicated my funds to some bigger spending categories such as entertainment, home environment, and child care.

Over time, our net worth has grown along with our household, and so have our expenditures — to the point that I now realize that our saving philosophies reflect what is described in #1 and #3 above. Based on our past spending and saving behaviors, I can see that we’ve allowed market psychology to dictate our financial decisions and we’ve been content with tying our savings rate to the growth of our incomes. In retrospect, I question whether this is true frugal behavior. If I were really a serious saver, I’d be using more of a fixed budget (#2), rather than playing things by ear with a variable budget (#1).

I’m not saying there’s anything right or wrong about these saving profiles: as long as we understand the consequences of our actions and behaviors, spending when we have the money shouldn’t necessarily be a “bad thing”. In fact, I can see how it may make sense for us to spend when the going is good, since one popular train of thought is to enjoy the stuff we can afford, for who knows how long the good times will last?

One other thing — for those of us who’ve slaved away to save and invest, only to see our investments decimated — wouldn’t it have made you feel better to have spent the money you’ve lost in the markets? I’ve heard this argument from some friends who’ve been grieving their portfolio losses of late. So should we take a page from the socialites’ pages and simply follow the lead of the markets — enjoy things while they last, conserve when things are in the dumps, and go with the flow?

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 21 comments… read them below or add one }

Frugal Dad September 23, 2008 at 9:59 am

I don’t know, I’ve been holding off on my planned $25 million yacht, too! Ha! As you said, it is all relative, but it’s hard to feel sorry for these folks when there are people out there adding cans of water to their soup to feed a family or four after Dad got fired.

The economy hasn’t changed the way I save money, although I confess to being a little more conservative in hard times.

Debbie M September 23, 2008 at 11:43 am

“Is this for real? Because I don’t see this as economizing at all, at least from the vantage point that I have.” I’m guessing you’re not a nanny, you don’t sell boats, and you don’t own a jewelry store. :-)

To answer your question, I can think of three things that make me change how I save money:

1) Pay raises – I tend to raise all my categories to match that or to keep up with inflation, whichever is lower. If my raise is higher than inflation, I’ll use my extra money to increase savings.

2) Economic changes – Ever since I got a deal on re-doing my roof because it happened to be near the end of a drought (and thus no one was finding out about new leaks, so roofers were not getting much work), I’ve tried to pay more attention to what’s on sale during various sorts of economic downturns. Right now might be a good time to get a deal on a house, a minivan, good stocks, or remodeling. Sometimes when it seems like interest rates are going to drop, I put some of my cash into a CD. When mortgage rates are low or average, I’d get a fixed-rate mortgage, but when they are high, I’d get a variable-rate mortgage. If you’re an out-of-work carpenter, you might want to move to the Gulf coast for a few months.

3) Personal opportunities – Sometimes you get opportunities for things that aren’t at the top of your list. For example, when my friend got a postdoc in Switzerland, I made plans for a vacation to Switzerland. A more normal example is when friends are moving and giving away things, I’ll see if I can use any of the things they don’t want.

Frugal Pursuit September 23, 2008 at 12:03 pm

I follow #2 spending philosophy and while sometimes it can be confining, the savings is unmistakable. However, I have found myself examining my spending more closely in the last few months and am less happy when I exceed a spending category or two. Conversely, I am happy to save more when a category has excess money.

Frank September 23, 2008 at 12:21 pm

It causes me to re-examine my overhead. One big monthly expense is inhome technology

1. If you need a cell phone (and who doesn’t?) get a pay as you go plan…this way, you use every minute you pay for.

2. Investigate broadband telephone service……(if you have broadband cable). Usually only $10-$15 per month, quality is good and has all of the features of a landline (such as 911 service, for a fraction of the cost)

Remember, cell phones DO NOT provide traditional E911 emergency response service

3.Cut down on your CATV (cable) Half of the basic cable channels go unwatched in my house.

4. Go through your monthly utility bills. I started looking at the family cell phone bill, and with some adjustments, shave about $150 off the monthly bill….

Emily September 23, 2008 at 4:57 pm

I think it really is variable depending on how much money you make. As much as it makes my stomach turn that someone would spend as much on a piece of jewelry as nearly what I earn every year, if someone is making $3 million a year, donates to charity (most people making that kind of money do), can pay all their bills, and wants to spend some of their money on something nice, can we really get mad at them? It definitely seems superfluous but if I was making that kind of crazy money, I’d probably be making some silly purchases too!

The economy hasn’t changed how I spend or save too drastically since I’m entry-level and have a pretty tight budget, but I am trying to eat out less and put a little more toward my emergency fund each month. My goal is to save up at least $10,000 in emergency funds.

Mr. Credit Card September 23, 2008 at 8:38 pm

See this is the problem with money. It’s the same reason that people who complain that they don’t make enough, will never in fact make enough.

If you can’t change the way you manage money, then no matter how much you make, you will never have enough.

Lack of money management means that whatever your salary, you will find ways of blowing it. Just like the folks in those examples are. Even if they categorize it as being frugal instead.

Michael September 24, 2008 at 9:43 am

I am definitely in category 1 and 3 as well. The difference may be how I react in category three. It sounds like people save less when the markets tank. I am a swim against the current kind of guy on this one. I dump more money in to the market when I see it tanking. In practice I tend to wait until I think it has bottomed out then I put a chunk of investment cash in. I see this as following the buy low sell high philosophy.

In college I was an economics major and while studying the business cycles in the U.S. I realized that the major capitalists and high end investors always bought when the market was in toilet. Conversely the investors that seemed to always get shafted were the ones that watched the market go up and up until they couldn’t resist and bought near the peak. I would rather be the person buying when everyone else is selling as long as I am buying the right stuff.

Doctor S September 24, 2008 at 10:18 am

I have zero sympathy for those rich people that are worried about their financial situation just because the market is bad. It is really sad to hear that their home in the Hamptons will be harder for them to pay off. Call me bitter or whatever, but I have seen so many articles highlighting the weathly and their money problems during our economy’s turbulent times, it makes me crazy!

My saving has been affected greatly by the economy. I consider me saving money by paying down my immense student loan principle. Due to the fact that the federal fund rate has decreased significantly over the last year, the interest rate on my student loan has gone down and my payments are eating up more of the principal. While I am saving some money on the side into my ING, everything else is pretty much fixed and when I can I just throw more at the loan. Great post!

IQSpending September 24, 2008 at 5:48 pm

Im #2!!

The more you make, the more you spend! It’s all about managing your money.

Its about budgeting yourself and stop buying things you want, buy the things you NEED and you will be ok =)

Scott @ The Passive Dad September 25, 2008 at 12:10 pm

What a nice problem to have if our household income shot up to $400k a year. I think we have found we tend to spend up to our income and try to set aside bonus and raises towards our emergency and long-term savings. It would be interesting if we start seeing ads from plastic surgeons or Tiffany department store for no money down or zero percent financing as they struggle through this economy.

Jake September 27, 2008 at 2:40 am

I only really spend on vacation and I make a fair amount of money but then again there really isn’t a whole lot to buy in Iraq. It sure does make it easier to save.

Curious Cat Investing Blog September 27, 2008 at 12:31 pm

The economy and market have very little effect on my saving. In general good personal finance ideas (for individuals) are good, no matter if the economy is strong or not. Businesses (and small businesses especially) can sensibly make adjustments but most people don’t need to.

What often happens is people are doing the wrong thing when times are good and when times are getting worse they then act like they need to change (really they shouldn’t have been making those decisions when the economy was good).

John September 28, 2008 at 5:51 pm

I think the state of the economy can serve as a wake up call to people who are piling up debt to buy luxuries.

It hasn’t affected me though because I have always lived well below my means. My lifestyle has always lagged my earnings by a few years.

Chris Hutcherson September 29, 2008 at 10:27 am

The economy doesn’t really affect how I save, because I’m too busy paying off debts to save much anyway haha. But at least most of my debts are almost paid off so I will be sitting in a pretty good position soon.

Writer's Coin October 7, 2008 at 4:04 pm

I think bashing rich people is natural but pointless. So they have a lot of money, so what? They’re losing even more in the stock market when this type of thing happens. Why hate on them for having built up a large amount of money and an opulent lifestyle? If it’s not for you, it’s not for you. No use getting all worked up about the Joneses having all this money we don’t.

Silicon Valley Blogger October 7, 2008 at 4:25 pm

@Writer’s Coin,

I always take on the attitude “live and let live”. I agree with you that it’s just too easy to make fun of wealthy people, and less fun (if not tasteless or even heartless) to make fun of the not-so-wealthy. But the wealthy folks are living the good life, and we’re all naturally envious of them, so what’s a little friendly jabbing once in a while? ;)

I think the jokes and the ribbing are a small price to pay for enjoying and living the good life, don’t you think?

I don’t really call this “hating” or “bashing” — it was simply an article that pointed out how the rich are affected even with what’s going on with the economy right now.

Plus, it doesn’t help when some of the affluent garner a lot of attention for the attitude and behaviors they display. I wish more of the rich would be like Bill Gates — he’s so low key, you forget just how loaded and influential he is.

mauricio October 10, 2008 at 3:00 pm

In our family, we have been trying to save money in a variety of ways:

1) We walk whenever possible
2) We turn out the lights when not in a room
3) We turn off the heating when we are not in the house
4) We buy based on need only
5) We compare prices online
6) Carpool when possible
7) Budget for going out to eat.
8) Coupons

Although we try to eat in most of the time, we know that it is impossible to do this for the entire month, so we try to ensure that we still have a little bit of money for leisure.

For comparison shopping I recommend at least checking Nextag.com and MySimon.com. By checking these sites you will get a comparison of all the other major comparison engines and retailers online so you can get the best deal for your needs.

I hope some of these tips can help you get through the rough economic times.

SSM October 24, 2008 at 12:54 pm

It doesn’t seem like economizing to me either, but it does depend on your perspective. For example, things that seem like everyday things to me now would have been extravagant given my salary 10 years ago.

I think no matter how much you make, you should know about budgeting money and how it effects your “bottom line”. Even if you are mega rich, you can’t expect to spend more than your income and retain your wealth!

Stephen Roland December 3, 2008 at 10:37 pm

This definitely isn’t economizing. My salary buys me the same as it did 10 years ago when you factor in inflation and my purchasing power.

Claire Sanchez June 8, 2010 at 9:47 am

Economy does affect everyone; even the rich folks are being conservative with their spending now. Hope the economy eventually recovers.

Robert October 21, 2011 at 5:34 pm

Except for my self-serving brother who owns two head shops. While his business was doing well like everybody else, he’s still goes on Mexico vacations for at least two weeks at a time. He thinks he works hard and deserves to “get away.” Every two-three months he’s back on the plane. Heck, the flight crews probably know him by now! His trips aren’t free. I’ve been to his Mexico spot once. Can I afford to go Puerto Vallarta and live comfortably like he does? No, my college degree in communications is rusting while I work graveyards for $9.25 an hour! My brother said not too long ago that business wasn’t doing good. So, why in the hell is he not staying put? I can’t talk to him; he won’t listen. He’s in Puerto Vallarta right now, while his big home sits empty.

Leave a Comment