Sunday, February 15, 2009

Spend More, Save Less

There is a lot of talk among economist that Americans need to spend more and save less to help get the economy moving again.  There is a reason why they are called economist and not financial planners.  It is true that Americans are saving more than they have in the past, but it may not be what you think.  Including in the savings rate are those who are paying down debt.  So if you put an extra $100 a month toward your credit card bill that is counted as savings.  What economist are saving is true, when everyone starts to “save” at the same time it has a negative impact on the economy, but telling people to spend in this environment is poor financial advice.

Americans are doing the right thing by paying down debt and padding their bank accounts.  It is not the role of the individual to get the economy moving in such a crisis.  Let the government borrow and spend.  They have the power to print money and tax the people.  They will not lose their home or go hungry from borrowing. 

In theory government spending should grow the economy and create jobs.  As individuals get a 3-5 year contract to build a bridge or road they will feel confident in their employment and start spending again.  Their spending will ripple through the economy and put more money in the pockets of merchants who may hire help or spend more themselves.  That is the theory, but before you start spending again the advice from the financial planning community is, pay down debt, build your savings and cut expenses. 

If the government stimulus does turn the economy around, then you will be in a better position and can always start spending again.  


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