Frugality is Bad For the Economy
The concept of frugality has permeated mainstream personal finance in the past few years. That’s understandable, given the state of the economy. For many who have been personally affected, following the loss of income or a job, this frugality is a forced approach. People are looking for ways to save money because they have less of it to spend. Those of us who have been fans of the concept of frugality have been proud that the rest of the country is starting to jump on the bandwagon, re-affirming our outlook on personal finance.
Businesses are experiencing a forced frugality as well, particularly those whose business models rely on access to credit, a resource that all but vanished for some businesses during the credit crunch. As CNN Money pointed out recently, business aren’t hiring because they’ve learned how to survive on less. The employment numbers aren’t improving significantly, and unemployment forces more people to live on less, just like those businesses.
The economy won’t improve until businesses begin hiring and the public sentiment about the economy improves. It’s a feedback loop.
The primary tenets of frugality work well within an individual’s personal finance philosophy, but once the concept becomes a movement that spreads to a greater population and businesses, the economy can’t move. Here are some of the aspects of frugality that improve your own personal finance, but when practiced by the business world, keep the economy from growing at the pace we would like.
- Building up your emergency fund. Businesses like to call this their cash reserves. One of the first steps to creating a solid financial foundation for your family is fully funding a savings account to a level that could cover, for example, six months’ worth of expenses. This keeps cash liquid to help pay for necessary items during an unforeseen loss of income. If a company were to take the same approach, it would mean they’re not increasing return for shareholders by either investing in their business or by returning the cash to investors in the form of dividends.
- Spend less than you earn. This tenet is so basic that anyone who doesn’t follow this rule will, given enough time, eventually find themselves without a home or any other assets. Most of the time, the results are less drastic. Credit card balances increase and families become buried among high-interest debt. Many businesses rely on leverage for growth, and without access to credit and without a desire to over-extend, they can’t compete in the marketplace as well as they could otherwise.
There are other aspects of frugality that don’t particularly have a negative effect when adopted by businesses en masse. For example, smart shopping — finding the best discounts and the best value, not necessarily the cheapest option — benefits the economy overall, because vendors who provide the most efficient solutions will receive the most business.
On a personal level, let’s keep frugality alive as long as possible. The sooner businesses are willing to take on a little more risk, however, the sooner employment will improve, people will feel they have more money to spend, and the economy will start growing.