Save Yourself

My grandparents experienced both the Roaring 20’s and the Great Depression during their young adulthood. Though they became wealthy later in life, they never changed their thrifty ways. Similarly, this Great Recession will cause a permanent change in the attitudes of this young generation that will affect our economy for decades to come. For the vast majority of Americans, the era of personal conspicuous consumption is over.

While this social paradigm change is manifest, many will still be mired in a period of denial before adjusting to this new reality.

The people screaming the loudest about our government deficits are often the very people who run personal deficits in their own finances. No matter how much money they make, they spend all of it and more. Some argue that cutting expenses for the common good is preferable to cutting their own expenses and that personal consumption is good for the economy. That’s lunacy to my way of thinking. The common good is not supposed to be a profit deal. The safety, health and education of Americans is a social obligation and government investment in infrastructure and research has always yielded technological advancement and enhanced prosperity, the rails, the interstate highway system, the space program and the internet just to mention a few examples.

A household should always run a surplus except during times of emergency. Accumulated surpluses are the stuff that grows personal net worth for most working people. Carrying debt works against this objective, especially expensive credit card debt. Pay off the plastic first.

Next, let’s take a sharp pencil to personal finances. To my observation, the biggest budget busters for middle class Americans are housing, clothes, jewelry and travel.

Housing is back on the list of budget busters after a couple decades of masquerading as an appreciating asset. Worse, during the boom, many people took these dubious paper profits and borrowed against them for additional expenditures. A house is a stodgy investment in normal times but the dividend is the pleasure of using it. Any appreciation is a function of supply and demand as well as inflation expectations. Since the supply of housing will be abundant for the foreseeable future and inflation is minimal, your house will not appreciate in value any time soon. Buy less house than you can afford and never build custom. Easy to say. Trouble is, a house is more than a place to live for some people and emotion driven decisions are almost always bad for your portfolio. Bargain with a partner who is emotionally attached to a non-economic view of homeownership.

Buying a house may be the most expensive use of personal funds but the least cost-justified use of funds is for personal adornment. I find it shocking what some people spend on the worst investments out there, clothes and jewelry. When you buy a depreciating asset such as a car, you always figure the resale value into your math. Some spend as much on looking fashionable as they do on owning a car and clothes have zero resale value. I have paid to have some old suits taken away to charity. I am not waiting for wide lapels or Nehru jackets to come back into fashion. About twenty years ago I stopped buying the latest styles and started buying only the best quality classic designs. Now I have enough quality clothing to last a lifetime and, though I will never be in fashion, I will never be out of fashion. Tally the savings over twenty years, add in appreciation on capital instead of depreciation to zero and the number will knock you out.

With jewelry, the investment is poor because most shiny goods are keystone marked up at retail, which means you’ve lost 50% of the item’s price the minute you leave the store. A tiny percentage of jewelry appreciates enough over time to make up for that big a bite on the front end. Still, jewelry can produce dividends of a personal nature. You have to decide what that’s worth.

The other budget buster is travel. We should all travel to broaden our worldliness as well as to get a tan and a drink. However, the difference between a well-researched plan and an indifferently prepared or delegated plan could add up to enough for a second vacation. I have a million mile American Airlines card and permanent gold status but I’m still a scrounger. The best way to save thousands on your travels is to take the time to do it yourself. It’s fun once you get the hang of it.

Sometimes the best deals are related to currencies. There are great places to go all over the world. Pick the places the dollar has the most purchasing power. One example: the Real in Brazil is flying high while the Argentine Peso is reeling; so go to Buenos Aires instead of Rio. The weather is better there anyway.

Or pick a place where the cost of living is lower than other places. Spain and Portugal have as much history, sun and fun as Italy but a vacation on the Costa del Sol or the Algarve will cost you half of what you would spend for similar accommodations on the Lido of Venice.

Those airline points you amass with your credit card purchases are worth more than you think. Instead of planning your trip around your accommodations, plan around airline tickets availability. If you are flying to a timeshare island such as St. Maarten, of course the flights will be packed on the move-in days of Saturday and Sunday so fly Friday or Monday. Reward fares will most likely be available. Buy the extra night at the resort and save hundreds on airfare. Speaking of timeshare resorts, they may not be a very good investment to buy but they are a bargain to rent. Unless you need room service, a two bedroom apartment with a full kitchen at a five star timeshare resort costs much less than a five star hotel standard room in most places. Buying “getaways” or “selloffs” to these resorts through Interval International, San Francisco Exchange or other timeshare brokers may be the best deals in the travel business, especially if you are going to places that have an oversupply of timeshare resorts such as Hawaii, Florida and Las Vegas.

You may not be able to help the government realign its debts and revenue streams but you can save yourself by practicing thrift instead of conspicuous consumption. It’s the wave of the future so get with the program. You can live within your means and still have money left over to grow your net worth if you scrutinize your personal expenses with the same diligence you do your equities portfolio. The survivors of the Great Depression learned a simple lesson I follow and maybe you should as well; it’s easier to save a buck than it is to make one and the one you save is worth more because it’s cash after taxes.