With all the talk about consumers pulling our economy out of a black hole, you might think that spending is more important than ever. But as saving rates creep higher after hitting historic lows, is common sense telling us that we should build a nest egg instead of buying a home?
The things you buy every day–food, transportation, stuff for school, etc.–are called consumer spending. It makes up 70% of the United States’ gross domestic product (GDP), the total value of all goods and services produced. Because of that, the economy feels it if consumers stop spending. Without people buying products, businesses stop producing and people lose their jobs, which means there’s even less money to go around.
Just because you need to spend money doesn’t mean you should just throw it anywhere. If you’re interested in spending consciously, here’s how:
- Buy local. Research has shown that for every $100 spent at a national chain or franchise store, only $13 is put back into the local economy. If you spend that same $100 at a local business, a whopping $45 sticks around. Hard to get an idea of what effect that can have? Then get this: if every resident of San Francisco switched just 10% of their spending from a national chain to a local store, it would create 1,300 new jobs in a city of less than a million people.
- Go for durability. Purchasing durable, affordable goods would seem like a no-brainer, but it’s not always that simple. Sometimes people sacrifice quality for a deal. This may be great in the short-term, but think about the consequences: purchasing a $9,000 car that lasts for seven years and consistently runs up high maintenance bills may ultimately cost a lot more than a reliable $16,000 car that lasts for 15 years.
- Avoid debt. It seems like basic advice: don’t spend money you don’t have. But the average balance per open credit card was $1,157 at the end of 2008, up from just over $1,000 at the end of 2006. Some of that money may have accumulated interest and fees too, so the price for that new computer could be more than was bargained for. Unless, of course, it’s paid for the old-fashioned way: by saving for it.
Just as there are reasons to buy, there are also plenty of reasons not to. Saving for both predictable expenses (like rent) and unforeseen events (like a car accident) isn’t just a good suggestion; it’s crucial to your financial health.
- College. Whether you’re heading to Yale or a state university, you need to set money aside to pay for it. The average annual cost of a four-year public university is more than $7,000 for the 2009–10 school year, 6.5% more than last year. Even if you get an excellent financial aid package, the less you have to repay in student loans, the better.
- Emergency savings. When bad stuff happens, you need to be prepared. If you’re a working adult and lose your job, unemployment benefits may not be enough. In New York State, for example, the maximum unemployment benefit is only $405 per week. It’s not just losing a job either: from car troubles to natural disasters, there are many reasons to set aside enough cash to tide you over.
- Investing. You might think it’s a little early to bulk up retirement funds, but not only is it a great idea for the future, it could help you in the present. For example, money can be withdrawn early from an Individual Retirement Arrangement (IRA) without penalty in some circumstances, such as paying for school or purchasing your first house.