A recent Bank of America Merrill Lynch study set out to determine whether Americans are actually saving enough money. In the 40 years that followed World War II, Americans typically saved between 6 and 10 percent of their after-tax income. Somewhere around 1985 that figure began to drift south, dropping below zero in 2005 as we spent more than we made with the help of easy credit.
Even the worst abusers of debt knows the best way to build wealth over the long run is to save money; this is no mystery. Economists seem to be on board with this concept again; however some of them are of the opinion that Americans could potentially save too much money in the aftermath of the recent recession. (I’m convinced that opinions are like armpits: everyone has them and a lot of them really stink.)
Save too much money?
John Maynard Keynes came up with “the paradox of thrift,” an economics concept that says if everyone saves money in times of recession, demand for goods will drop. As demand drops the economy stalls, causing a whole host of other problems. Consumer spending drives two-thirds of our economy, so this saving business is no laughing matter.
Here are two reasons why “the paradox of thrift” doesn’t hold water in our current world:
First, when people stop spending money on goods and services, prices fall. This is basic supply and demand. As the prices fall, there will be buyers who enter the market and spend money on a particular item.
Second, even though the money is being saved, it isn’t removed from the economy. When you save money in your bank savings account, the bank lends that money to others for business development. Likewise, you can save by investing in new or longstanding companies. Either way, you’re stimulating the production of goods and services and creating jobs for those companies.
So, you’re actually helping the economy by saving your money. (Those of you stuffing cash in mattresses are not; you’re actually losing money when you account for inflation, but that’s another conversation).
