Sunday, January 25, 2009

As economy falls, more people put money away in savings

For the better part of two decades, Americans have been busy spending wildly and racking up as much debt as possible. But that appears to be changing.

For the first time since the federal government started keeping track in the 1950s, the national household debt level actually fell a little last year.

The personal savings rate — after dipping below zero on a couple of occasions during the past eight years — is now creeping upward, meaning people are saving more of their incomes.

Ironically, a trend that seems so praiseworthy may further worsen the economy in the short term, as laid-off workers and even people with good jobs curb their spending. But it could mean good things for the economy in the long term, if it lasts.

People are rethinking their attitudes toward debt — people such as Jesse Doeinck, 31, whose days of enjoying late-night entertainment and profligate spending ended soon after the recession began and his son was born — seven months

"The economy does scare me,'' said Doeinck, a Verizon sales manager. "Even though I perform at my company, that doesn't mean we're not in jeopardy. If I lost my job, I would need some time to find another job."

Even affluent wage earners such as Bill McConnell of Brentwood are rethinking how they spend money — cutting back on even minor expenditures such as dry cleaning.

After a near-cataclysmic loss of wealth in the stock market and in housing values, many Americans are beginning to save more of what they earn and trim their debt.

Affliction under control

It's the wealth effect that has gone away, or as Middle Tennessee State University economist Bill Ford puts it, "affluenza" has cleared up. That's the common malady of spending more money than you actually make, a sickness fueled by the perception that stock portfolios and real estate values were bound to keep increasing. Home equity loans became plentiful, funding things like new cars and home improvements, perhaps too easily.

Now, many lenders are simply unwilling to hand out loans the way they did a year or two ago, despite the billions of dollars in aid the federal government is giving them in the hopes of fueling an economic revival.

After handing out money as if it were Monopoly paper, a few financial institutions have gone out of business. And many Americans have watched more than a decade of their stock market returns shrivel by a third or more.

Bill McConnell, a senior manager at cell phone insurance company Asurion, is one of those people.

"It essentially wiped out all of our gains,'' he said. Now, the 37-year-old executive's plans to retire at age 55 seem more like a hazy dream. He and his wife, a dermatologist, are saving a little more, even though they haven't really seen a decline in their paychecks from work.

They go to Costco and buy food in bulk. They've cut back on eating in restaurants. Recently, they spent about $6,000 on a Disney vacation, instead of going to the Barbados, as they did two years ago at a cost of about $10,000.

McConnell worries not just about the economy but also about whether the Obama administration and Congress will raise his income taxes, and whether Social Security will be bankrupt by the time he retires.

"I don't have confidence anything will be there for us or for our son,'' he said. "Our goal is to leave a nest egg for our son and get some flexibility to deal with life."

Cushions get thicker

David Hayes, a certified financial planner in Mt. Juliet, said many of his clients are increasing their savings and holding on to last spring's government stimulus checks instead of spending them. Watching friends and neighbors get laid off while their own stock portfolios dwindle has had an impact, too.

"I would say my clients are acting more responsibly as a result of this," he said. "They feel the wolf is at their door."

Some financial planners are altering their advice.

Instead of recommending as little as three months of emergency funds in the bank, as some financial planners used to do, Bill Garrett of Garrett Financial in Brentwood now tells clients to keep at least six months of cash on hand to weather the recession.

"I don't know too many people who are entirely secure in their jobs," he said. "We're going to see a lot more layoffs and we don't know where it's going to stop."

Doeinck went to Garrett a few months ago to get his finances in order, and he has decided to build up a six-month cash reserve. The economy and the birth of his son have helped change his spending habits. "We were living a young lifestyle,'' said Doeinck, who said he and his wife went out occasionally to bars and managed to run up $19,000 in credit card debt in their 20s.

Now, at 31, Doeinck is paying off that debt as well as a car loan. Gone is the roughly $50-a-month gym membership that he rarely used. His wife, who stays at home to care for their child, has given up her tanning bed membership.

"I could do some push-ups and run around the block,'' he said. "As far as tanning, my wife can lay on the back porch."

Will people stay frugal?

Some doubt the newfound frugality of Americans will really last. But if it does, it could lead to more money for investing, for people to start businesses and to provide for their own living expenses if another economic downturn arrives, economists say.

"I think it's going to be a while before people are comfortable tapping housing wealth and depending on that. They're going to want savings," said Vincent Reinhart, a former Federal Reserve economist who works at the American Enterprise Institute, a conservative think tank.

Reinhart said low savings rates have led to a reliance on foreign investors who buy up government debt to fuel the federal government's increased spending.

During the 1980s, the national personal savings rate ranged from 7 percent to 12 percent. It was 2.8 percent in November, the latest figure available from the federal Bureau of Economic Analysis.

Lisa Mensah, the executive director of the Initiative on Financial Security at The Aspen Institute in New York, said a lack of savings has diminished the financial security of Americans, just in time for a global financial crisis.

"We have a bigger long-term problem to fix with our savings, investment and ownership, and I do think now is the moment to fix it,'' she said. "Sometimes, when Humpty-Dumpty falls off a wall, it's time to rebuild it."

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