During normal times, I would be advising people to look for ways to cut spending and shave a bit of money from their monthly budgets in order to free up a little cash to save and invest. But these are not normal times. While you do want to be spending less than you make always, and for many people that means cutting back on expenses where they can, if everyone does that now it will make the current situation worse than it already is and end up costing you a lot more in the future. Here’s why.
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Sudden new-found cash
If you’re a “normal” person, meaning that before the shutdown you would go out to dinner and lunch a lot because you were busy, buy a lot of new clothes, stop in for a coffee on the way to work, and buy a lot of stuff you don’t remember at various stores around town, you’re probably finding that since you’ve been staying at home most of the time that you have a lot more cash left over from your paycheck than you did before. It is cheaper to eat meals in than it is to go out, a lot cheaper. If you go out for a lot of meals each week, you might be finding that you have a couple thousand dollars more this month than you did last month. Dinner for four at a casual restaurant with drinks and tip can easily cost $80. A meal cooked from scratch at home with an inexpensive bottle of wine or a beer can be had for $20. That’s $60 per dinner. Likewise, you could probably save $40 on a lunch and $30 on a breakfast.
You might be thinking that cooking really wasn’t that bad, the food was as good or better than what you had eating out, and you’re getting a lot less salt and grease than you were. Perhaps you’re cooking as a family and getting some great quality time with your kids. Maybe you’re thinking that you’ll start to eat in a lot more often, not only for the money you’re saving but the health benefits as well. Maybe you’re starting to look up recipes for some of your favorite meals you were buying at the chain restaurants.
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You’re also not spending much money on gas, not buying many clothes, not doing dry cleaning, not paying daycare, and not spending on activities. Since you’re not going to the gym, you might also be thinking about cancelling your gym membership for a while and cancelling other subscriptions you aren’t using. You’re also not going to the movies, not stopping for frozen yogurt, and not hitting the bar after work for happy hour. You probably are amazed at how little you’re spending without all of this stuff. You’re thinking you can start saving up the money you’re not spending and maybe start funding that 401k you’ve been neglecting.
Why this is not the time
If you have no savings, it would make sense to start putting some of the money you’re saving away for a rainy day or emergency fund. If you really don’t have any money saved, at least enough to cover you for a few months, you should start putting some money away. While you may still have your income, there is nothing to say that things might not change and you might find yourself laid off. If that were to happen, you’d want to have some money to allow you to continue to pay your rent or mortgage, buy food, and purchase other necessities. I’m hopeful that when all of this is done you’ll put the lessons provided in FIREd by Fifty: How to Create the Cash Flow You Need to Retire Early and become financially independent before you see you 45th birthday.
Now isn’t the time, however, to aggressively put away money. The reason is that while you may be lucky enough to have a job with the government, an executive job in a company that is still somewhat functioning, or some other job that continues while you work from home or make other accommodations, there are a lot of other people who are not as lucky. These may have been people at restaurants that you frequented just a week or two ago, stores that you visited regularly, or services that you relied upon before you found yourself staying at home. While your income continues, perhaps at the same level as it did before the shutdown, theirs does not, and they’re probably wondering what they’re going to do until things start to open up again. Even when things do start to open, there is no guarantee that the business that they worked for will be there anymore. Not without support from people who still have an income like you.
This is different from charity
Don’t think of continuing to buy from others as charity. These aren’t individuals looking for a hand-out, but for the ability to continue to provide goods and services to others in exchange for an income just as they have always done. They want to do what you are doing, but they have been forced to stop while you were lucky enough to continue. Perhaps they cannot provide these goods and services in the same way — you can’t go and have a dinner in a crowded dining room — but you could still enjoy a take-out meal or perhaps buy a gift certificate for when this shutdown comes to a close and you can go have a meal out once again.
It’s also not charity because, in helping others, you’re helping yourself as well. You may not realize it, but money that you spend, rather than storing up in your bank account, will eventually come back to you. For example, if you work for the government, your income comes from tax dollars. If no one is spending money at shops and restaurants, barbers and dry cleaners, for yard services and daycare centers, tax money drops. It may take a while, but a city or state will also need to start cutting back if tax revenues drop. Your salary is not guaranteed. Certainly, future raises depend on continued growth of tax revenues.
Your spending creates growth of the economy
Another reason to keep spending money, rather than saving, is that you’ll help keep the economy from contracting, and even help the economy grow, if you do so. Whether you buy items from the local shop or not, that shop owner and all of the employees still need to eat, have a place to live, and buy necessities for their lives. If you continue to patronize them in whatever method you can, they can trade you things that you want or need in exchange for the money that you provide. In doing so, they spend their time making things and creating services that you enjoy. You get something and they get something.
If you decide to just hold onto your money, they don’t spend their time creating things. Instead, they sit idle, so there is less “stuff” being produced. But they still need to eat, have shelter, and survive, and the resources they need to get those things need to come from somewhere. This means the support for them will come from you, in the form of higher taxes, charity, or perhaps by force. Instead of you trading with them and getting something that you desire and them getting something that they desire, you will end up supporting them and getting nothing in return.
Buying and selling, running businesses and working, are not just ways to get money. It is about people doing things for others. Figuring out what others need and providing it to them so that they can get what they need in return. Each individual specializes on a task and focuses on that task, becoming efficient and acquiring tools to make the task easier so he can produce more and reduce costs. He does this knowing that he doesn’t need to worry about doing other tasks because others will take care of those tasks for him. A roofer doesn’t need to farm, a salesman doesn’t need new clothes, and a real estate agent doesn’t need to cash checks. Each of these individuals has dignity and purpose in doing his or her part. To keep this going, individuals in each role need to continue to be supported.
So, keep spending
If you still have your job and your salary, keep supporting the businesses you were supporting before the shutdown however you can. Buy their services when you can and as you can. Arrange to purchase future services and pay in advance if they cannot be provided now. If we can keep the money flowing, there will be no need for huge government bailouts that we will be paying off for years to come and that will endanger the future solvency of our country. It will also keep people from becoming desperate and doing things like turning to socialism to take money from those who still have money, or simply resulting to thievery directly.
Trade is good for you and good for everyone. Keep things rolling.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.