Consumer Spending Turns to Saving as Recession Aftershocks Shake Confidence

Your Future -This Way or That

The People Next Door

It seems easy to understand why the people next door drive a car that must be 14 years old, dress quite plainly and don’t much if anything on landscaping. He is a sell-employed carpenter and she is an assistant in a doctor’s office. Neither has a college education. But, each of their three children went to an Ivy League undergraduate college and then on to an Ivy League business, medical and law school. One of the children mentioned to you how grateful they were to have left school without a cent of debt. When you’ve spoken with either of the parents over the years, they’ve never complained about their children’s educational expenses or indeed about anything to do with money. How can this be? Their combined incomes can’t be over $100,000, yet it seems they may have paid over a half million dollars in educational expense for their children. Your annual household income is $250,000 but you live paycheck to paycheck.

The main difference between you and your neighbors is that they are sitting on a stock portfolio worth $4 million, throwing off more than $120,000 per year in dividend income. You couldn’t raise $10,000 if you had a month to do it. How in God’s name did this come to be? Neither of the neighbors inherited anything.

Here’s what happened. In the early 1970’s, when your neighbors and you were in the early 20’s, they realized they would probably not make great incomes so they decided to live beneath their means, utterly to ignore advertising, to buy used cars, stay out of bar rooms, restaurants and malls, and to invest what little they could spare in the stocks of companies that sold things to other people, such as you.

They bought shares in what was then Philip Morris, and of Johnson & Johnson, Colgate Palmolive, Procter & Gamble, GE, Wal-Mart, Coca Cola, William Wrigley, and Abbott Laboratories. They got into Microsoft in the late 1980’s at 10 cents per share. They had the broker deliver the shares to them so that they could reinvest the dividends and buy more shares without paying brokerage commissions. Over a period of some 35 years, your neighbors invested maybe $200,000 of their own savings plus all the dividend income. While you were going through your considerable income buying new cars, running up big credit card balances shopping at Burberry’s, Barney’s and Brooks Brothers, Neiman Marcus, and Bloomindales, eating out 5 times a week, ordering drinks made with premium priced liquor and leaving money on the tables of Indian-run casinos, your neighbors were reserving against their future obligations and for a time when they might not want or indeed be able to work. While you were unable to separate your wants from your needs, your less well educated neighbors had no trouble doing that for themselves. The result is that capitalism turned your income into your neighbors’ principal. One not so small consequence was that their children could apply to Stanford, Princeton and the University of Chicago without requesting a cent of financial aid. If you don’t think that sways the minds of top college admission committee members, think again.

Now, your neighbors love their jobs, in large part because they know they don’t need them and could cease working on any given day. You and your spouse hate your jobs because you know you have to keep them and maybe to work until you are 70 or older. You might want to continue to be most cordial to your neighbors’ children. When you end up looking for a job, one of them might give you a reference.

Oh, wait…you suddenly awaken from the horror of this wretched scenario and discover it was but a dream and a nightmare at that. You are still only 28 and what has been written above is but one possible outcome. Fortune has favored you and given you a second chance. If you are comfortable with the future outlined above, keep doing what you’re doing and you’ll get it. Keep spending all your income on consumer junk and trying to live as if you were a person with money and be sure to plan to work for a high school kid when you are 70, maybe parking cars.

If, on the other hand, you want to be able to live more or less without financial worry, curb your spending now and begin investing. Sure, driving a flashy car, having $50 lunches and $100 dinners, drinking martinis made with Grey Goose vodka and buying $500 Jimmy Chu shoes seems stunningly enjoyable now, but, I assure you, it won’t come up to having $4 million when you are 60.

We are in for a lost decade like Japan

There are signs all around that the "good 'ol days" are gone for good. Friends are pulling their kids home from private schools and out of state and private colleges. The average college student graduats with $45,000 of (unbankruptable) student loan debt.

One-third of my daughters 40-friend fellow-graduate circle from engineering school is couch-surfing (unemployed, living temporarily with friends or family); another third is really worried about job layoffs, wage and hour cutbacks and job security; and the third that is well-employed are saving like crazy, living simply, and knowing they cannot ever depend on Social Security, Medicare or traditional defined benefit pension plans. This recession is affecting elderly, parents, the youth and children...and all are going through a generation-changing "great recession".

When the Gross National Product of the US depends 71% on consumer spending and the spending significantly declines generationally...this means a change in the entire American economy. It may NEVER be the same again.

predictions

How can anyone make such long term forecasts? People in this country have short memories and little discipline. The savings rate will be back to negative and another asset bubble will be created. Gas was $4.50/gallon only last summer. People are again buying large vehicles thinking that these lower oil prices will hold forever.

Everything changes very quickly today. Mort writes these articles as if he has a crystal ball.

Blessed and debt free

I am blessed to be debt free!! I pay off my one credit card every month. My investments are doing fairly good .My retirement is very good and I save at least 35%. My 15 year old New Yorker gets over 27 MPG at cruise set at 65 on the highway. I have so much stuff that I don't need any more. I see stores jammed with merchandise that has to be moved out. That worries me. Consumption (TB)killed many back in the30's A new type of consumption is affecting the U.S.S.A today.

I shop at the Goodwill stores for fantastic bargains.Sombody is throwing away a lot of expensive items.

I recently did not buy a new house because the H.O.A. rules and limits was 17 pages long . It read like a GESTAPO directive. I am in good health and have TRICARE for LIFE.

The tellers at my bank call me by name!!!

Great Article Mr. Zuckerman

Mr. Not a bankers friend and Mr. Old Fashion have it exactly right in my opinion. I am not a genius at all of this but I did learn about the danger inherent in inflationary policies. The consumption economy was so insidious because we consumed always trying to hedge our investments from the deadly inflation virus. Eating away at the value of our dollar. Inflation is destructive of the good intention of a cash based society. If you save a thousand dollars with inflation at a 6% per annum rate, the first of next year that thousand only buys 940$ worth of goods, so in 10 years you have to have $10,600.00 to buy what 10,000.00 does today. That is a break even. So to save, inflation adjusted, and keep viable when you age, you must do more than just save, you must plan and invest. Albeit in yourself.

Most do not have the discipline my friends above have. Truly I wish we all did. It is the only way to survive financially.

In 25 years, I will be dead, LoL...so lets do something now...and I don't mean borrow 10 trillion dollars in the next 10 years...

Also old fashion

I had similar experiences as "old fashion" states. There is nothing like paying cash to make you realize the value of a dollar and eliminate the impulse spending that a credit card generates. Credit cards are for big buck emergency spending like car repairs while on the road. I only save $15 of my salary a year, but have still managed to create a $350K 401k by staying on the conservative side of investing. I agree with never trust a banker, they are worst than used car salesman. Sorry, I didn't mean to insult used car salesman.

My bank, Key Bank, always wants to know if they can increase my credit limit on my paid off credit cards, can the increase my home equilty loan limit on my paid off house, etc. They look at the savings/cd's I have and actually want my business. Something about having a customer that does not default on loans and such. For Key Bank, they want/need me more that I need them. Other banks like Huntington and National City never ever 'talk' to me. Seems they are too busy chasing deadbeat type of customers. Although National City before being acquired by PNC did offer me a 150% home equity loan, no questions asked! I almost pulled my checking account from them because of that. After all, how smart could they be making offers like that. $10 billion in debt and being acquired by PNC shows how smart.....

Pay yourself first via savings, pay cash, then worry about banks and such. Trust in the Lord.

Lucky and debt free

Once I became debt free in 1999, (no house, car, credit card, or loan payments, I maxed out my 401k savings. Now that I'm 50+ it's still maxed at the $21,000/year, but into a Roth 401k instead of a regular 401k. My employer still matches at 50%. I "only" make $88,000/year in the IT field, plus work various websites I own with ads via Google/Yahoo/Amazon for another $30,000 a year additional as a secondary income. I know I'm lucky, but I'm saving/investing in dividend paying stocks like Sherwin-Williams(SHW), Alteria (MO) and other solid companies. The banks send me crap offers for annuities where they are the middleman/commision taker. The banks offer no garrunties, take no responsibility, just a "give us $100,000 plus" junk offers. If I had a spare $100K it would never go to a bank! Many friends with money are buying forclousures/houses to rehab/rent out. I am too. It is amazing what $50k can now buy in the housing market! Try 5 acres, 4 bedroom, pond, water well, septic system, extra barn. Thank You bankers for 3 years ago making all those fake promises of 0% down adjustable rate mortgages with the false promise of "don't worry you can always refinance in 3 years when the loan comes due". I felt those loans were to good to be true and never went for them. I know of multiple people in trouble because of that. The bankers are NOT your friends and never have your best interests at heart. All the bankers want is your money.

My kids just graduated collage also debt free due them to going to Ohio State University and working multiple jobs/internships. They have excellent starting salaries ($55k) each in the engineering fields. They also pay cash for everything. Fortunately, the banks would only five them a $500 Discover Credit card so they never ended up using credit cards. Banker explanation: they are credit risks because they pay cash for everything. The fact that each of them managed to accumulate $15,000 in cd savings while in college makes no difference to the greedy bankers. No credit cards allowed for them. Thank You bankers! My kids see credit cards for what they really are--devt traps!