To Save or To Spend?

Posted on September 6, 2010 by Dr. David Edward Marcinko MBA

Understanding the Decision

By Somnath Basu PhD, MBA

Should we save or spend? What’s good for me and my family? Is the time right for us to be buoyant and optimistic about the future? How do we decide what fraction of our income to spend and how much to save? Isn’t spending a good thing for the economy as we are constantly being reminded about? If we do not spend now, how are we going to feel about all these unfulfilled wants and needs that we have especially when we see others around us fulfilling? How much should I spend for gifts during this holiday season – is that not a good idea to bring cheer to my family? It is a very perplexing set of questions that constantly sway our mind as we try to grapple with what we feel should otherwise be moderately simple decisions. In arriving at these seemingly easy decisions, consumers are facing some of the toughest issues in their everyday lives. It may be useful to dig a bit deeper into the issues related to spending and saving decisions so that we may understand a bit of their complexities and make prudent choices whose outcomes will clearly validate our reasons for doing so.

The Save or Spend Decision

If the decision to save or spend is problematic, it is because it is neither simple nor anything new. We have coped with these same decisions through many generations, and more. The understanding we have collectively arrived at is, however, worth visiting. When we spend, we receive immediate gratification. This “feel good” feeling is so good that we are willing to sacrifice a lot in order to attain this feeling. Saving, on the other hand, is bereft of any such immediate good feeling. The only good feeling that can accrue to us is that we have this “felt’ promise to ourselves that a moment in the future will feel better than both the loss of satisfaction from immediate gratification of wants and the hurt of having unsatisfied wants. Alternately, we may want to save because we feel threatened that a future situation may arise that may lead to more misery tomorrow than the joy gained today. Thus, the main question in trying to answer whether to save or not is whether it is a promise or a foreboding about the future.

Attitudinal Sea Change

Over the last 25 years, our attitude towards spending has undergone a sea change. Even until the early 1980s we were saving in double digits as a nation. Since then, we have slowly moved away from this psyche and have adapted our lifestyles towards spending and consumption on a scale we have never experienced before, historically. By 2006, we were actually spending about one percent more than what we were earning. This change was stimulated by many factors including the plentiful inflow of cheap products from China, a steady rise in income, a considerable increase in the promotion of mass consumption through enticing advertisements in practically all media, the access to cheap credit sources, increasing house prices and the accompanying ability to borrow from the increase in its equity value, etc. Above all else, this shift from saving to spending was overwhelmingly reinforced by the feeling of empowerment in being able to command goods and services for consumption and the enjoyment from the increase in our standards of living that came from our new found affluence. Whereas every generation before us (baby boomers) had sought to leave more for their kids than what they themselves inherited, we reasoned with ourselves that educating our children was sufficient for them to look after themselves. This attitude allowed us also to spend and consume more not only without guilt, but also with pleasure. More so than ever, we got addicted to spending. Nothing felt better than spending.

The Flash Crash of 2008-09

Then came the great recession of 2008-09! The economy plunged, companies laid off workers by the thousands, people who had bought homes even if they could not afford it, on the promise that house prices would never go down, lost their homes. Moreover, the cheap Chinese goods we got used to were being produced by our own national companies so that the economic rebound was now being hailed as a jobless recovery. We had outsourced away all we had for some corporate bottom line and had impoverished ourselves in the process. Only now, we had no savings for the rainy day that had befallen us.

Americans Saving Again

Perhaps one of the more pleasant surprises from this recession is that we turned the clock around on saving and in the short span of two or three years we have our savings level back at five percent. Why did it happen this way in spite of our government encouraging us to spend our way out of this recession? Primarily, this change has come about from the possibility of losing our jobs or enduring deep cuts in our incomes. This fear today is more real than ever before and it seems to have taught us a “savings” lesson that we have all learned. When deciding on whether and how much to spend, we should take absolutely no chances in first putting away a small nest egg for a rainy day or “emergency” fund, in more technical terms. It is imperative that we defend our families in the event of losses in job and income so that we can bear out whatever future storms come by our way. It is only after we have done so should we consider spending. A six-month contingency fund [even more for medical professionals, according to ME-P Editor Dr. David E. Marcinko] should be perhaps the most staple item in our household budget. It is heartening to see the resiliency that runs through our nation’s citizens as we collectively undo our habit of reckless spending.

Assessment

Once we have our emergency nest egg in place, we should consider our spending pleasure. Going “cold turkey” on spending is not advisable either; maybe a gradual weaning away from this compelling habit. Ask yourselves before you spend whether it is a “need” or a “want”. Healthy food and holiday cheer for the family, basic transportation expenses and healthcare are needs. Starbucks coffee is a want. As we prudently spend on needs and wean away from wants we also save. And saving is not only for our future “feel good” consumption. It is also for the immensely gratifying feeling that we will leave something for our children, through whom we will live in the future.

NOTE: Dr. Somnath Basu is a Professor of Finance at California Lutheran University and the Director of its California Institute of Finance. He is also the creator of the innovative AgeBander technology www.agebander.com for planning retirement needs.

Conclusion

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Other Print Books and Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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