Af-flu-en-za n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by dogged pursuit of the American Dream. 3. An unsustainable addiction to economic growth.
A matter of debate among many in the personal finance community is if the adversity caused by the economic downturn will alter consumer spending habits. Recently, this topic was discussed on CNN when they ran a story about hard learned money lessons brought about by the recession. The report focused on a survey conducted by Consumer Reports gauging the new view of money. Of those polled, 71% stated that, as a result of the economy, they have gotten into the practice of only purchasing items they needed as opposed to wanted.
Consumer Reports has dubbed this new phenomenon “intelligent thrift” — a psychology where individuals replace credit with conservatism. Whether or not these lessons are going to resonate with the public remains to be seen; however, the logic is not far-fetched. Since the recession began in December of 2007, the number of unemployed persons has risen by 7.4 million — an increase in our unemployment rate of 4.8%. Currently, 14.9 million people are unemployed in our country, and it stands to reason that the circumstances they are facing will leave a long-lasting impression.
Unemployed or not, the recession has affected each of us. Through the community seminars I conduct, I have seen a definitive shift in individual’s financial concerns. Whereas in the past it was somewhat difficult to motivate attendees to create a budget, or Spending Plan, the topic is now the most popular. Even the questions posed during these seminars have changed. Previously, the predominant amount of concerns were related to reestablishing or building credit; however, such inquiries are dwarfed by questions as to how to properly create an emergency fund and pay down existing debt. Obviously I cannot speak for the country as a whole, but I can say that the people I have educated lately have adopted a different approach toward money.
Will the newfound “intelligent thrift” mentality remain when we emerge from the recession? Well, there are two factors that will help to determine the concepts longevity. The first being lending practices and the second being individual experience. Throughout most of this decade consumers fueled their lifestyles through home equity loans and credit cards. Since the economic downturn, lenders have significantly altered lending practices, and the days of easy access to credit may be long gone. Therefore, people will have to rely more on cash going forward. Psychologically, it’s a lot easier to swipe a piece of plastic for a purchase than taking cash out of your pocket. Think about it, if you had to buy something for $300 and had to part with fifteen $20-bills as opposed to swiping your credit card, which would seem easier on your wallet?
Furthermore, the degree in which someone is affected by the recession will also shape future spending habits. For those who have not endured reductions in pay, a layoff or any other destabilizing event in employment, their approach to spending will be considerably different than someone who has. As for individuals who are returning to work after a prolonged period of unemployment, I can tell you that their logic has changed dramatically. In the Spending Plans these folks are developing, there is a sense of immediacy in establishing an appropriate emergency fund. While Cambridge generally recommends such a fund should be comprised of 8 to 10 months of someone’s expenses, these individuals are intent of building funds which contain upwards of a years worth of expenses because of their experiences.
Will thrift replace affluenza? As always, time will tell; however, all indications point to intelligent thrift remaining an important aspect of our lifestyles. To some degree, each of us will adopt an acceptable level of thrift due to outside circumstances; to what degree, it truly all depends.