Does Saving Stimulate the Economy More than Spending?

This post is from GRS staff writer April Dykman.

When the 2008-09 financial crisis hit, my husband and I were debt-free and building our savings. We were proud of what we’d accomplished, and I used to stare at our savings balance with a smile after every payday.

At the time, all I seemed to hear was that we Americans had to spend our way out of a recession, that spending was the key to growth. Besides $862 billion in emergency government spending, everyday joes and janes were encouraged to spend through home-buyer credits and programs like Cash for Clunkers. (This wasn’t unique to the current administration, either; the former administration encouraged Americans to “go shopping,” as well.)

Some people say these programs were a success — that Americans are eager for their government to tell them what to do. Others believe that spending is what led to financial disaster in the first place, and more spending isn’t the answer.

You know what? I honestly don’t care. I’m more focused on my personal economy. My husband and I made great headway with our personal finances, and we aren’t about to stop and jeopardize our future by buying a new car or a flat-screen TV. We have goals, and we’re set on hitting them. Someone else is going to have to buy those cars and houses, because we’re focused on building our financial future.

But a recent article in Fortune, “The Naked Stimulus: Why Savings Stimulate More than Spending,” piqued my interest, and I came away with a different understanding of why some people argue that spending our way out of a recession doesn’t work.

Writer Shawn Tully explains that using basic economic math, you can’t borrow from the savers (the taxpayers) to give to the spenders (the government) and expect that to change the GDP. Tully writes:

All savings are spent…GDP measures all spending on all the goods and services that America produces. Savings translate, dollar for dollar, into a major component of that total spending: investment. All the money that the administration successfully moves from savings to consumption simply channels one type of spending to another, in precisely offsetting amounts. It’s like filling a swimming pool from one end, and draining it from the other end. The level doesn’t change. Nor does GDP change when the government drains investment to lift consumption.

How do savings translate into investments? When we save money, most of us don’t hide it in a jar on the top kitchen shelf. Sometimes we buy stocks, which provides companies with money to expand. Sometimes we deposit our money into savings accounts or buy CDs, which the bank lends to corporations or to the government through the purchase of Treasuries. Basically, the money is spent whether you buy a flat-screen TV or deposit it into a high-interest savings account. Even when banks tighten up on lending, they still invest in Treasury bills to earn interest.

The exception to the rule
Tully concedes that there’s one situation where borrowing could raise the GDP, a situation that he says influenced the theories of British economist John Maynard Keynes. During the Great Depression, when Keynes formulated his theories, people didn’t trust banks, so they kept cash in safes or under the mattress. This meant the money sat outside the system, so the federal government encouraged the hoarders to buy Treasuries.

But that’s hardly the situation we’re in today, where most people keep all of their money in the banking system, and most deposits are insured.

Tully hypothesizes that had the government not intervened by borrowing money, the redirected money would have gone elsewhere:

Two other components of GDP would have to be larger to offset the almost $900 billion in spending and borrowing. First, private investment would be higher, because of the bigger pool of savings, a great sign for the future…Second, the U.S. wouldn’t have to borrow nearly as much from abroad. As a result, the dollar would be lower versus other currencies, reflecting its true value.

Hence, imports would be more expensive, and our exports far more competitive on the world markets. The rise in exports would help offset the hit to GDP caused by lower consumer spending. Bigger investment and exports on a tear? That’s certainly a good alternative to the results of the stimulus.

Tully believes it’s possible that our current situation would be the same, but the outlook would be better for our economic future. What do you think of the theory of spending out of a recession versus saving to stimulate the economy?

J.D.’s note: Though we generally try to steer clear of politics at GRS, that may be tough today. This topic is inherently political. All I ask is that during this discussion, you be respectful of each other. Debate is great, but please leave aside the name-calling and gross generalizations.

This article is about Economics, Savings  Wednesday, 15th September 2010 (by April Dykman)  

View the original article here

The Prioritized Spending Plan

I don’t often get to listen to Dave Ramsey’s radio program. For one thing, I don’t know when it’s on. For another, the only radio stations I usually listen to are my satellite radio channels. (Those would be dance music on xm81, chillout music on xm84, classic country on xm10, and 1940s music on xm4. And oh, how I miss Fred, which was replaced by the execrable 1st Wave on xm44.) About once a year, though, I stumble across Ramsey’s show while I’m driving around town.

I found the show last week, on my way to pick up Kris from the airport. I was in the mood to listen to the cadence of Ramsey’s smooth southern drawl as he dished out financial advice, so I got to hear his opinions on:

Lending money to friends (don’t do it!)Buying a home before repaying student loans (don’t do it!)Long-term care insurance (do it!)

But the segment I really remember was his response to an e-mail from some sort of salesman. The salesman — a car salesman, maybe? — was finding it tough to budget because he was paid on commission, which meant his income fluctuated from month to month. For him, it was basically famine or feast. He wanted to know how to cope with this.

Budgeting for an irregular income
Last year at Get Rich Slowly, I shared my own method for dealing with variable income. Because blogging produces money in fits and starts, I’ve developed a system that helps to smooth things out. To summarize:

I base [my budget] on my minimum monthly income from the past twelve months. Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital.

I developed this method over several years of trial and error. I like it. It works for me. (And, I hear, for others.) But I think Ramsey’s method is interesting, too. If my method doesn’t work for you, try his.

The prioritized spending plan
If you have an irregular income, Ramsey says, you should create a prioritized budget. I’d never heard of this before, and I think it’s kind of clever. Here’s how it works.

List your monthly expenses. On his show, Ramsey suggested brainstorming them onto a piece of paper. If you track your spending, it’s probably much more effective to build a list from your existing data.Rank each expense in order of importance. On your list of expenses, put a “1? next to the most important item. (”That’s food,” Ramsey says.) Put a “2? next to the second-most important item. (”Those are your utilities,” Ramsey says.) Put a “3? next to the third. (”That’s housing,” Ramsey says, which confuses me. How are utilities more important than housing?) And so on.On payday, work your way down the list. Set money aside for the most important item (food) first. Then the second. Then the third. When you run out of money, you just stop.At the end of each month, re-order the list. Your new list will probably be similar to the old one, but there could be changes.

While I find this an intriguing idea, I feel like Ramsey didn’t provide enough info. For example, he totally glossed over the issue of surpluses and deficits. I can make some guesses about his advice (”Bank a surplus to protect against deficit months…”), but I’d like to hear what he thinks on this.

Also, I think this sort of prioritized spending plan assumes that every expense is “all or nothing”, but many aren’t. If I’m budgeting $100/month for restaurant meals, $25/month for clothing, and $50/month for comic books, for instance, I don’t necessarily need to put all $100 toward dining out before allocating even a penny to clothes or comics. What’s Ramsey’s advice for dealing with categories like these?

Update: Some GRS readers who are much more familiar with Ramsey than I am pointed out that he usually recommends the prioritized spending plan for folks who are in a different financial situation than I am. I can make ends meet, but my income fluctuates. Ramsey’s plan is for people with variable incomes who can’t make ends meet. It’s for folks who have to make choices about where they’re going to put their money because they can’t fund everything. That makes sense. Thanks for the clarification!

And where does Ramsey suggest debt fall on the list? Saving? Tithing and/or charity? Is it all subjective?

I suspect I’m over-thinking it, but that’s okay. I just like hearing new money-management ideas, and I especially like thinking about them and how they might be applied to my own life.

Do you have a variable income? How do you budget? Have you tried a method like Ramsey’s prioritized spending plan? How did it work for you?

This article is about Budgeting, Gurus  Thursday, 23rd September 2010 (by J.D. Roth)  

View the original article here

Does Saving Stimulate the Economy More than Spending?

This post is from GRS staff writer April Dykman.

When the 2008-09 financial crisis hit, my husband and I were debt-free and building our savings. We were proud of what we’d accomplished, and I used to stare at our savings balance with a smile after every payday.

At the time, all I seemed to hear was that we Americans had to spend our way out of a recession, that spending was the key to growth. Besides $862 billion in emergency government spending, everyday joes and janes were encouraged to spend through home-buyer credits and programs like Cash for Clunkers. (This wasn’t unique to the current administration, either; the former administration encouraged Americans to “go shopping,” as well.)

Some people say these programs were a success — that Americans are eager for their government to tell them what to do. Others believe that spending is what led to financial disaster in the first place, and more spending isn’t the answer.

You know what? I honestly don’t care. I’m more focused on my personal economy. My husband and I made great headway with our personal finances, and we aren’t about to stop and jeopardize our future by buying a new car or a flat-screen TV. We have goals, and we’re set on hitting them. Someone else is going to have to buy those cars and houses, because we’re focused on building our financial future.

But a recent article in Fortune, “The Naked Stimulus: Why Savings Stimulate More than Spending,” piqued my interest, and I came away with a different understanding of why some people argue that spending our way out of a recession doesn’t work.

Writer Shawn Tully explains that using basic economic math, you can’t borrow from the savers (the taxpayers) to give to the spenders (the government) and expect that to change the GDP. Tully writes:

All savings are spent…GDP measures all spending on all the goods and services that America produces. Savings translate, dollar for dollar, into a major component of that total spending: investment. All the money that the administration successfully moves from savings to consumption simply channels one type of spending to another, in precisely offsetting amounts. It’s like filling a swimming pool from one end, and draining it from the other end. The level doesn’t change. Nor does GDP change when the government drains investment to lift consumption.

How do savings translate into investments? When we save money, most of us don’t hide it in a jar on the top kitchen shelf. Sometimes we buy stocks, which provides companies with money to expand. Sometimes we deposit our money into savings accounts or buy CDs, which the bank lends to corporations or to the government through the purchase of Treasuries. Basically, the money is spent whether you buy a flat-screen TV or deposit it into a high-interest savings account. Even when banks tighten up on lending, they still invest in Treasury bills to earn interest.

The exception to the rule
Tully concedes that there’s one situation where borrowing could raise the GDP, a situation that he says influenced the theories of British economist John Maynard Keynes. During the Great Depression, when Keynes formulated his theories, people didn’t trust banks, so they kept cash in safes or under the mattress. This meant the money sat outside the system, so the federal government encouraged the hoarders to buy Treasuries.

But that’s hardly the situation we’re in today, where most people keep all of their money in the banking system, and most deposits are insured.

Tully hypothesizes that had the government not intervened by borrowing money, the redirected money would have gone elsewhere:

Two other components of GDP would have to be larger to offset the almost $900 billion in spending and borrowing. First, private investment would be higher, because of the bigger pool of savings, a great sign for the future…Second, the U.S. wouldn’t have to borrow nearly as much from abroad. As a result, the dollar would be lower versus other currencies, reflecting its true value.

Hence, imports would be more expensive, and our exports far more competitive on the world markets. The rise in exports would help offset the hit to GDP caused by lower consumer spending. Bigger investment and exports on a tear? That’s certainly a good alternative to the results of the stimulus.

Tully believes it’s possible that our current situation would be the same, but the outlook would be better for our economic future. What do you think of the theory of spending out of a recession versus saving to stimulate the economy?

J.D.’s note: Though we generally try to steer clear of politics at GRS, that may be tough today. This topic is inherently political. All I ask is that during this discussion, you be respectful of each other. Debate is great, but please leave aside the name-calling and gross generalizations.

This article is about Economics, Savings  Wednesday, 15th September 2010 (by April Dykman)  

View the original article here

The Prioritized Spending Plan

I don’t often get to listen to Dave Ramsey’s radio program. For one thing, I don’t know when it’s on. For another, the only radio stations I usually listen to are my satellite radio channels. (Those would be dance music on xm81, chillout music on xm84, classic country on xm10, and 1940s music on xm4. And oh, how I miss Fred, which was replaced by the execrable 1st Wave on xm44.) About once a year, though, I stumble across Ramsey’s show while I’m driving around town.

I found the show last week, on my way to pick up Kris from the airport. I was in the mood to listen to the cadence of Ramsey’s smooth southern drawl as he dished out financial advice, so I got to hear his opinions on:

Lending money to friends (don’t do it!)Buying a home before repaying student loans (don’t do it!)Long-term care insurance (do it!)

But the segment I really remember was his response to an e-mail from some sort of salesman. The salesman — a car salesman, maybe? — was finding it tough to budget because he was paid on commission, which meant his income fluctuated from month to month. For him, it was basically famine or feast. He wanted to know how to cope with this.

Budgeting for an irregular income
Last year at Get Rich Slowly, I shared my own method for dealing with variable income. Because blogging produces money in fits and starts, I’ve developed a system that helps to smooth things out. To summarize:

I base [my budget] on my minimum monthly income from the past twelve months. Using my minimum monthly income instead of my average monthly income gives me a safety buffer. And when you have an irregular income, a safety buffer is vital.

I developed this method over several years of trial and error. I like it. It works for me. (And, I hear, for others.) But I think Ramsey’s method is interesting, too. If my method doesn’t work for you, try his.

The prioritized spending plan
If you have an irregular income, Ramsey says, you should create a prioritized budget. I’d never heard of this before, and I think it’s kind of clever. Here’s how it works.

List your monthly expenses. On his show, Ramsey suggested brainstorming them onto a piece of paper. If you track your spending, it’s probably much more effective to build a list from your existing data.Rank each expense in order of importance. On your list of expenses, put a “1? next to the most important item. (”That’s food,” Ramsey says.) Put a “2? next to the second-most important item. (”Those are your utilities,” Ramsey says.) Put a “3? next to the third. (”That’s housing,” Ramsey says, which confuses me. How are utilities more important than housing?) And so on.On payday, work your way down the list. Set money aside for the most important item (food) first. Then the second. Then the third. When you run out of money, you just stop.At the end of each month, re-order the list. Your new list will probably be similar to the old one, but there could be changes.

While I find this an intriguing idea, I feel like Ramsey didn’t provide enough info. For example, he totally glossed over the issue of surpluses and deficits. I can make some guesses about his advice (”Bank a surplus to protect against deficit months…”), but I’d like to hear what he thinks on this.

Also, I think this sort of prioritized spending plan assumes that every expense is “all or nothing”, but many aren’t. If I’m budgeting $100/month for restaurant meals, $25/month for clothing, and $50/month for comic books, for instance, I don’t necessarily need to put all $100 toward dining out before allocating even a penny to clothes or comics. What’s Ramsey’s advice for dealing with categories like these?

Update: Some GRS readers who are much more familiar with Ramsey than I am pointed out that he usually recommends the prioritized spending plan for folks who are in a different financial situation than I am. I can make ends meet, but my income fluctuates. Ramsey’s plan is for people with variable incomes who can’t make ends meet. It’s for folks who have to make choices about where they’re going to put their money because they can’t fund everything. That makes sense. Thanks for the clarification!

And where does Ramsey suggest debt fall on the list? Saving? Tithing and/or charity? Is it all subjective?

I suspect I’m over-thinking it, but that’s okay. I just like hearing new money-management ideas, and I especially like thinking about them and how they might be applied to my own life.

Do you have a variable income? How do you budget? Have you tried a method like Ramsey’s prioritized spending plan? How did it work for you?

This article is about Budgeting, Gurus  Thursday, 23rd September 2010 (by J.D. Roth)  

View the original article here