Savings and America's foolish optimism

Rod, we are the ones who did sacrifice and save. We chose mutual funds with long track records and good Morningstar ratings and diversified just like you are supposed to. Do I have to tell you what has happened to those savings?

I have money taken out of my paycheck before I even see it. A percentage to my 401K plus 10% directly to my savings account. It's easier not to nickel-and-dime away your cash when you don't have much cash. Things might get tight at the end of the month, which isn't fun, but my savings account grows and grows and grows.

But Rod's comment about the $8 he spends on lunch when he doesn't pack one from home raises an interesting point. He could stave off hunger by getting a 99-cent burger at McDonald's; that $7-saving would add up. But then he'd be eating crap, which is another losing game in the long run. There have been a lot of posts on this blog about why people choose to eat cheap, unhealthy fast-food; here's a reason why some might, even if they know better.

Ant

I know that American consumers are blamed for not saving money instead of spending it, and at the level of purely individual choice this is true.

But I wonder if we can talk about our lack of savings without referencing another idea that percolated during the Great Depression and is sometimes credited with helping to end it: the concept of planned obsolescence.

We can all tell stories of the refrigerator that is forty-five years old and still working fine, or the dishwasher from 1963 that may not have today's fancy features, but is still chugging along and doing the job of washing dishes. And we can all tell tales of woe from more modern appliances, such as the number of washing machines I've owned in thirteen years (three so far, and the second one broke the quickest), and the $400 microwave the builder installed that was replaced once under warranty; then that unit died, too, and we decided we didn't really need a microwave at all. How many cars don't start needing major repairs as soon as the extended warranty expires, if not considerably before? How many lawn mowers does an average family go through in a decade? How many people have to replace normal plumbing components such as sinks, toilets, showers or tubs, etc. due to some kind of breakage within the first ten years of a home's life? (I think of that last because our eight-year-old home needs some replacements along those lines--yet a house build in the 1950s we looked at when we were house-shopping still had the original fixtures.) Our eight-year-old a/c unit, the nice service man who fixed a problem for us earlier this year told us cheerfully, will probably need replacing in two to three years, too--yet the ancient furnace in my grandparents' old home is probably still working fine.

Beyond the money shelled out annually to replace big-ticket items that should have continued working twice or three times as long as they actually did, we have the "image" or "style" or "technology" obsolescence problems. The first two can be avoided somewhat, in that it's not necessary to fall for the consumer game of "Your clothes are *so* 2007!" if we choose to move beyond that, but the technology aspect has become a problem. We constantly end up buying new iterations of stuff we already own, because some element of software or hardware has changed significantly enough to make our current gizmo no longer useful, or as useful as we think it ought to be. And if our employer expects us to carry and use that particular gizmo as one of the invisible ties that keeps us connected to our job 24/7, then we "upgrade" it without question (even if we wince a little at the price tag).

We've been conditioned to believe that stuff just *can't* last and needs to be replaced on a continual basis--and to a certain extent this is absolutely true, in that stuff manufactured as cheaply as possible to maximize the profit margin of the manufacturer and the retailer isn't going to be long-lasting stuff, for the most part.

Now, none of this means that Americans shouldn't try to regain habits of thrift and avoid frivolous spending in order to save more money; but the three-dollar latte or eight-dollar lunch looks pretty small next to the bill you just got for the latest big-ticket appliance etc. to turn up its toes and die on you, so you shrug and keep spending--and that's exactly how you're expected to behave.

Florence raises the first thing I thought of when I started reading this post: where to save and how? The folks at NPRs Marketplace aren't big on gold, since it's "pure speculation". I suppose really conservative mutual funds (balanced funds, bond funds, money market funds) and CDs and passbook savings accounts make a lot of sense now.

Ant raises another thing I thought of in broad strokes: if we're convicted about living Crunchy lives in various ways -- buying good food instead of processed crap, having mom stay at home and breast feed instead of going to work, and for those of us who are Christians (or otherwise practicing some other faith), giving money to church -- it's hard to find anywhere to save. I have to work a few odd jobs to make ends meet, and that's that. There is no real money to save. We really don't go out to eat that much, and when we do, it's relatively inexpensive local fresh mex; we don't have cable or satellite (just an internet connection:)); we drive an older, inexpensive, compact car that's paid for.

Erin raises two things for me:

(1) Not every company plans obsolescence into their products. For instance, it's my understanding that Toyota and other Japanese/Asian manufacturers explicitly rejected that approach, and it's not for nothing that Toyota moved ahead of US makers in autos sold here in the US last year. I think some research might help here -- although

(2) I've heard the "big ticket" vs "little things" debate argued various ways. And of course it is both/and. Little things can add up to hundreds of dollars a month -- lunch & lattes a few times a week when one is on the go. But then big things can be hundreds of dollars. So I suppose we watch both expenditures.

I'm new to this blog, and don't know if this piece has been brought up before, but everyone, please Google and read "The Gospel of Consumption" by Jeffrey Kaplan, in Orion Magazine. It's wonderful.

"A big part of it is that so many of us today have never lived through seriously hard times, ergo we thought that prosperity is the natural order of things."

The past is a hard teacher to decipher. You can see that in Prof. Mankiw's piece. We've learned quite a bit, but we're still human beings prone to mistakes.

As a Jew, I've often had conversations over the years about the holocaust. Some friends believe that it would now be impossible, some believe we're just one or two bad regimes or catastrophes away from extinction.

All I can tell you is that the U.S. and Jews are still here, and I expect we will be well into the future.

But I do save a lot, I sold my house last year, and I do worry about how Jews are treated. So I'm optimistic, but careful. That's my advice.

Finally, we need to help people who are really in need through these times. I hope we can all agree on that, but maybe we don't.

But like I said, a little bit here and a little bit there, and the money disappears all the same.

This is where using an old-fashioned system of cash and envelopes comes in handy. When you get paid, put what you need to cover your bills & savings in the bank, then divvy up the rest of the spending cash among envelopes marked for groceries, gas, eating out, etc. I even have a misc envelope for blow money -- money I get to spend each month on whatever small whim comes my way (books, coffee, whatever).

This really helps because you see the cash and you see it dwindling. You budget yourself better this way, and you're also more likely to not accidentally dip into the money you needed to set aside for paying the bills & putting up savings. It sounds elementary, but this is how smart people used to do it way back when.

Envelopes, people. They are the key!!

Kristen, envelopes, I like it!

I do it with a spreadsheet, I've been doing it with spreadsheets since VisiCalc (anyone here old enough to remember VisiCalc?) but the envelopes have a certain tactile quality that appeals.

Big ticket items OK, that's a given, you don't buy a new car, get it? but the real way to save money is a penny or two at a time. We grocery shoppers who spent years on welfare and food stamps know this. You can't save hundreds, or even tens, of dollars at the supermarket. At the supermarket you save money by nickels and dimes, if you're lucky. And smart.

But guess what, ten dimes is a dollar, and those dollars really add up if you push on it hard enough. We had to, we were really poor for a long time with two small children, and what I don't know about curbing spending probably isn't worth knowing.

Now I'm glad I know this stuff. It's probably not too likely I'm going to have to use most of the hard-core strategies, but like money in the bank, I know it's there if I need it.

I also know from experience that it wasn't so bad as all that, poverty, and that there are an awful lot of very good experiences you can have - most of the best experiences, really - that don't cost a penny. I have a lot of warm, happy, funny memories about not having any money.

Chris is right - a cheap thermos from a thrift store can save you hundreds or a thousand per year if you fill it with home-brewed coffee instead of buying it buy the cup.

We taught our son money management skills with envelopes. It opened his eyes to the power of saving a bit at a time.

Rod - here's how I remember lunch. Pack the containers from dinner leftovers right after supper, and keep the lunch bag out on the kitchen counter. There is a big sign at eye level on the back door: BLUE LUNCH BAG.

Not only that, Chris, elizabeth, unless you work right across the street from Starbuck's (in which case you're lucky to get out at $2.50!) the coffee in that thermos will be better coffee.

So much of this game is like that. Homebaked bread is not only vastly cheaper, it's fresher and tastes better. (And is better for you than all but the most expensive boughten bread.) Actual cooked meals are better than anything you can buy ready-made. You can have roast beef sandwiches for lunch cheaper than you can have bologna: just price out prepared lunch meats by the pound (they price them in a deliberate attempt to conceal the facts here, so you're going to need a calculator) - plain old baloney costs more per pound than prime rib.

On and on. Anything that's been prepared ahead of time for you, up to and including a can of beans, will be at least half again as expensive as the item itself, and usually more.

How hard do you want to work on this thing? Well, how much money would you like to save? If you're content to live above your income you needn't bother with any of this.

Prefer not to say, I hear you! You'll get no blame from me, because I know exactly what you're talking about. Sometimes just being a decent human being keeps you from being a virtuous saver. You said it, sister. Or brother. If I had a big fat savings account with all the money in it that we've spent on taking care of people, we'd be all set for retirement, that's for sure. I believe it was a higher authority than myself who recommended putting your 401k where thieves couldn't break in and steal it. You have made investments of the very best kind.

Drive along (it's probably impossible to walk along) the nearest suburban commercial corridor. Make a tally of the stores selling stuff you actually need. Imagine most of the others empty, and their employees and suppliers out of work. Note that many of these potentially unemployed retail/distribution workers are among the most poorly educated, least skilled and lowest paid in our economy.

This is not a pointless exercise. We could see something very much like it in the next couple of years.

As domestic manufacturing declined, the U.S. shifted more and more of its low-skill workforce into retail and service jobs, largely dependent on consumption of non-essentials, and cushioned their lower pay with easy (albeit usurious) credit. Now the credit is drying up; and as the consumer economy declines, so will the low-skill jobs.

We are looking at a seismic shift in our economy. Simply tightening our belts and saving more will not address the problem -- in fact, it will intensify the problem in the short term. Productive employment has to be found for the workers cast aside in the decline of consumerism, or we will see exponential growth in the underclass and all the social pathologies that go with that.

It seems obvious to me that we're not going to make it through this economic transition without some serious government intervention. Stimulus via tax rebates has been tried, and will be tried again, probably repeatedly. Obama has proposed big public investments in education, infrastructure and alternative energy development and tax breaks for employers creating jobs. McCain advocates continuation of the "trickle-down" policy of low taxes on those in upper brackets, whose investments in turn create jobs.

We can, and will, go 'round and 'round ideologically on those contrasting approaches. But we really need to be asking ourselves a practical question: What gets us through the transformation of this economy with the least social disruption?

Nightstalker,

There's an entire population of hard-working deeply moral Americans who live hand-to-mouth. It's not that they don't "know." They work in coal mines, they pick the fruits and vegetables on your table, they work at the grocery stores you shop in and the restaurants you eat in, they work at the filling stations where you buy your gasoline and wash your car at the car wash, they sell clothing and cosmetics, they make sure your kids cross the street safely at school crossings.

Every bargain you get is purchased in the paycheck of someone else.

For many good people life is so much harder than you seem capable of imagining, and its not being made any easier by people who claim they're stupid or foolish or lazy or being bamboozled by liberals.

"A mutual trust between client and bank was once the foundation of our financial system - we need to get it back"

I never know what to think of posts like this, but it did make me think of Rod Dreher. William Rees-Mogg in The Times:

"The bank manager then occupied a similar position to the family solicitor or the family doctor. He hoped to maintain a long-term relationship with each client and he hoped that this relationship would survive for generations. He would offer general financial advice, and was concerned to keep the interest of the client and the bank in alignment.

He did not lend the bank's money to people he thought might be unable to repay it. That would plainly be against the interests of the client as well as of the bank. He would, however, try to find a way of meeting the needs of vulnerable groups, including students - which I then was - widows and businesses under trading pressures. The customer who failed was seen as a failure for the bank, because it would be regarded as a lack of banking competence. The customer who built up a successful business would also be a good advertisement for the bank.
Banks were there to help their clients and to keep them out of trouble. "

I have to admit that I like this banker:

"Where relationship banking still survives, there have been relatively few problems of bad debts. The problems have arisen in transactional and unsecured credit card banking with one-off or completely unknown customers. Of course the customers have often behaved badly; if a bank does not know its customers, who are only blips on a computer screen, some of them will behave badly. The bank only has itself to blame...

The decline of moral responsibility has damaged British banks; it is the real flaw behind the credit crisis. There will be new regulation of the world's banking system after the crisis. Governments cannot risk another catastrophe on this scale. The banks need to change their behaviour. They need to re-establish relations with their clients and value experience in their staff. They need to beware of American-style, high-risk, high-return, policies. British banking was based on protecting the client's interest as well as the bank's. Bankers should not be ashamed of their Victorian heritage."

I don't quite see things this way, as I wonder if this bank would have lent money to my family. Nevertheless, there's something to be said for the sentiment, even if it is an idealization.

Planned obsolescence... I'm with Erin Manning. So much money is spent on repairing fancy-but-unstable items. Like cars with ultra-advanced electronic features and monitors which, when they fail, not even a qualified mechanic can sometimes figure it out. Like toilet fixture parts that are made of PLASTIC to save a few pennies, when metal parts would never break. I just installed some Pella sliding doors and was shocked to see that some parts were plastic. Inferior materials and planned obsolescence are everywhere, and they cost us. I hope the character of this country will improve after the current depression, like it supposedly did after the one in the 1930s, and we'll go back to long-term quality.

But I do wonder: If your pay were suddenly cut by 5-10%, and you had to either like it or lump it (i.e., find another job)... What would you do?

I don't want to speak for "prefer," but allow me to give you a peek into my experience.

In a similar situation we ran credit card debt, always with the hope that things would turn around, which is where Rod's "foolish optimism" comes in. We got lucky, and things worked out, and our only debt in the past ten years has been our mortgage. But I still remember the stress and sleepless nights, and the foolish optimism that saw us through.

***But I do wonder: If your pay were suddenly cut by 5-10%, and you had to either like it or lump it (i.e., find another job)... What would you do?***

Well, I'd start making minimum payments on my credit card instead of paying as much as I possibly can per month to get my debt down.

I bet that wasn't the answer you were looking for. Maybe I should be eating cans of dog-food for lunch instead of packing my oh-so-pricey turkey sandwiches? ;-)

****And I'm curious: If you had a stash of savings in the bank, would you feel that you weren't doing your utmost for loved ones who rely on you? *****

I think it would be a huge help to my family -- especially to my parents who won't be able to support themselves in a couple of years -- if I had some savings we could work with. Then again, it's a huge help to my family when I can help them keep a car of theirs running, so they can keep getting to work. Because their going to work every day also helps us all keep our heads above water.

And I want to stress -- I am not poor. I draw a solidly middle class salary (although I have family who don't, which I guess is an expensive "choice" on my part) and I have no children of my own. I live in a relatively cheap real estate market. I have health insurance. I am not one of the truly poor.

Nightstalker,

There's an entire population of hard-working deeply moral Americans who live hand-to-mouth. It's not that they don't "know." They work in coal mines, they pick the fruits and vegetables on your table, they work at the grocery stores you shop in and the restaurants you eat in, they work at the filling stations where you buy your gasoline and wash your car at the car wash, they sell clothing and cosmetics, they make sure your kids cross the street safely at school crossings.,

Oh, please! Get over yourself. I know who these people are, they are my neighbors and some of my friends. And I used to be one of them. My questions still apply and are STILL perfectly rational. EVERONE makes choices. Few have no choices at all, but these are NOT who we are talking about. We're talking about people who live middle class and and higher lifestyles who have saved NOTHING.

Every bargain you get is purchased in the paycheck of someone else.

Garbage.

For many good people life is so much harder than you seem capable of imagining, and its not being made any easier by people who claim they're stupid or foolish or lazy or being bamboozled by liberals.

I have only one thing to say about this. You're stupid. Well, you are if you think I'm ignorant of the hard life. The first 8 years of my married life was lived well under what's considered the "poverty" line. I did manual labor, my wife delivered newspapers, and we had no idea what a vacation was. I ask the questions PRECISELY because MY start in life had those same faults, and I lacked the same financial literacy I mentioned.

And I know very well what it means to lose your job. I did. my wife did, and we went bankrupt, lost everything, even our home. Yes, I know EVERY situation intimately from dead poverty to being well off.

Funny, my mother in law lives on a fixed income of less than 700 dollars a month (disability and social security together). Since we took over managing her finances, she now has a savings account and puts a little in every month.

We add a little now and then, as well.

She just had a "vacation" retreat at a resort on the coast with her sisters. Saved for. Money to spend. Amazing.... NOT.

Chris and prefer,

Yes, the credit card issue can definitely throw a wrench in the works.

prefer said: "I bet that wasn't the answer you were looking for."

I wasn't looking for any particular answer, prefer. I pose this question to a lot of young people just starting out (we have a lot of college hires at my company) who say they can't afford to save. Sometimes they have good reasons, sometimes they don't. The ones that don't sometimes rethink their assumptions and start a saving plan.

Anyway, you ARE making choices. You believe they're the right ones (I'm not saying they're not) and that's fine. But don't say you have no choices.

Ant

Saving money -- in a bank account where you can lose money every year with inflation zooming? In stocks that crash? In gold that has "never been worth zero" -- except, well, when you go to eat it.

I'm enough of a Luddite to think the only place to save money is in your home. Not in the mattress, in the walls -- pay off the mortgage before buying stocks and bonds and gold. Shoot, buy a cow before buying stocks and bonds and gold.

My fantasy is to have my basement full of canned veggies, my Victory Garden, my milk cow and chickens, my paid-off home on small acreage with a well and solar. Then I can settle in, secure in the knowledge that if the next Great Depression comes, I'll be the first one shot. . . . . .

Daniel Gross at Slate notes the downside of saving during an economic downturn:

http://www.slate.com/id/2203026/

Nightstalker,

I'm stupid, no doubt about it.

Your anger simply mystifies me. By your writing it seems you've managed to pull off an amazing feat and make your mom's $8,400 annual income (about 20% below the poverty line for a single person) include a resort vacation...that's as good as the miracle of the loaves and fishes, you ought to be thrilled about it, not angry at people who don't have your financial skills.

Rather than be pissed off at people who live now the way you once lived you should write a book. Seriously. If you can show people how to be so financially competent that they can take a resort vacation without borrowing a dime even if they live at 80% of the poverty level you'd make millions.

Don't waste your energy being angry because you've been blessed with financial skills that the world needs now more than ever and other people haven't. Spread the wealth of your knowledge around!

And give your anger a rest, it's not good for your heart.

"My fantasy is to have my basement full of canned veggies, my Victory Garden, my milk cow and chickens, my paid-off home on small acreage with a well and solar. Then I can settle in, secure in the knowledge that if the next Great Depression comes, I'll be the first one shot. . . . . ."

LOL, Lisa P. Sounds about right to me. Stock up on alcohol, maybe you could make peace offerings so you're only the third one shot. ;)