Budgeting, Stimulating the Economy, and Choices: What To Do?
I’ve explained before that I have no real financial management credentials. In fact, the topic of finances used to scare me, and I used to much prefer the sticking-one’s-head-in-the-ground approach to financial management, which is how I ran up so much credit card debt not that long ago. Now that I try to keep an eye on finances and use a zero-based budget regularly, I know that finances are just like everything else: they are only scary when you don’t pay attention to what is going on.
In many ways, it has been encouraging to see people dialing back their spending in recent months. There had been such a long period of gross overspending and fashionable conspicuous consumption, that I think it was inevitable a backlash would occur at some point. No doubt the news about an impending real estate crash helped to fuel this sudden consumer conservatism as well, and there is no doubt that there have been job losses and foreclosures and market crashes and everything you hear from Charlie Gibson each night. There are some real financial hard times upon us, and certainly it will pay to keep a closer eye on your expenditures in the months (and years) to come.
That said: the economy crashing is kind of a chicken-and-egg situation. If we do not spend money, the economy cannot get better. Businesses need money in order to employ people, so the more we avoid spending, the more people who may eventually get laid off. Some people are not in a position where this makes any difference, since they are trying to feed their families and keep their homes. But there are also many people who had been spending and suddenly stopped out of fear. They might not be severely hurting, but they feel like they need to scale back, and as such have cut out everything. They’ve gone from 100 to 0 in the space of two months. And it is to these people that I want to speak today.
People hear the word “budget” and they think it means that they will never be able to have fun again. They think that to scale back or to try to be frugal means no more buying stuff from the mall or going on vacation, and driving an old car until it falls apart on them. What I wanted to say today is that a budget is just a set of choices, like anything else. People might wonder how I can write a personal finance blog and then buy expensive shampoo or Lacoste shoes for my kid–these may seem like extravagant expenditures to somebody else. And perhaps they are, but they also illustrate a point about budgeting: you make a choice when you budget to spend whatever you are going to spend where you want to spend it. Some people might rather spend less on shampoo and put more money into their entertainment budget (mine is not as large as it might be, what with Mini not being able to go see movies and everything). Or, somebody might want a nice vacation and scale back on the brand name groceries they buy. A household budget can provide for any of these scenarios–the purpose of a budget is not to keep you from spending but to allow you to tell the money where to go, rather than the other way around. You are in charge of your money, and you get to decide what categories are bigger than others.
So when people cannot decide if they should “save” or “stimulate the economy,” my answer is: you should do both. The answer to a recession is not to stop spending. The answer to a recession is to take a look at your finances again and see how you can start spending smarter. You may go through some months where you cannot afford to do much of anything extra, and there may be some times that it’s hard to make the numbers balance out. But you should never feel like you have no choice in what you do: there is always a choice as long as you are willing to accept responsibility for managing your finances.