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Spend or save?

December 10, 2008

I know anyone who reads this will say, “Save!” That makes sense. We don’t know if we’re next to be laid off or when our customers will dry up. So we do the natural self-preservation thing – hoard our cash just in case.

Let me tell you what happens when we stop spending. The eating places we go for our meals will find their income dropping. To survive, they will eventually reduce their prices. And it’ll keep dropping until their income can no longer cover costs, a point where the business is no longer viable. Then they close shop.

The other businesses we frequent will go thru the same thing. When income drops, they dip into their emergency funds to keep operating until they can no longer pay their rent and staff’s salaries. Then they close shop.

Worst case scenario: When no one buys anything anymore, eventually the shopping malls close up. People don’t go there any more because no one wants to spend.

What happens to the staff of these businesses, the owners and everybody’s dependents? If their savings are gone, they will suffer the same fate as everyone else. They will lose their cars, homes, etc.

If you are employed by one of these businesses, you too could be hung out to dry.

When the demand chain dies, the entire supply chain will die along with it. We are all interconnected.

Everytime I tune into CNBC or CNN and listen to the talking heads advising us what to do, I sense confusion. One talking head would say, “Spend! Spend!” An hour later, another one would say, “Save! Save!” They are confused. The viewers are confused. Everyone’s confused.

So having gotten some new appreciation about the difference between wants and needs, many of us settle for the middle ground. Needs are food, transport, and a roof over the head. Anything else is not a need and hence can be sacrificed.

As I walked thru a PJ shopping mall yesterday, its heartening to see people putting their priorities in the right place. People are spending on food (couldn’t believe the crowd at the upscale restaurants that’ll set you back at least $50 per head), people still keep their transport (BMWs and new Toyotas still fill up the parking lot), and they still spend on a roof over their heads (I think I saw people signing up for upscale condos being promoted).

And people are still going in crowds to see the latest Nokia cellphone.

So yes, people have got the message and they are spending on essentials. Its just that urbanites seem to have a different definition of essential.

Is that good or bad?

I say it’s more positive than negative. Their spending helps keep a few thousand cooks, waiters, traders, executives, builders, etc. keep their jobs and homes intact. Their kids can continue to go to school. If you are in the IT industry, whether or not you lose your job depends on whether anyone buys your hardware, software or services. You would want people to keep on buying from your company so you can keep your job.

There are many perspectives on situations like this and I think its important to keep a cool and balanced head in these times. Many people seem to think their salaries grow on trees. They don’t. Our salaries come from other people’s wallets and we’re just one player in the whole interdependent chain of events. If we decide to hoard our cash, that’s fine. But if everyone in society decides to hoard their cash as well, then we better start planting our own vegetables to survive.

Note: I’m not advocating spending all we got. I’m advocating balance. What that balance is will depend on our individual financial state and priorities. I don’t think there’s a single answer that fits everyone.

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4 Comments leave one →
  1. December 10, 2008 9:39 am

    Spend on what you need and avoid going for the extremes. You don’t need the latest Nokia phone, or the RM 50 per person lunch. Those are wants.

    Anyway, I think it’s important for people to keep spending (not too much) but also important for them to be aware that most corporations ARE cutting costs. And if you’re in other industries besides retail, then you will feel the heat no matter how much you are still willing to spend. Because if your clients cut cost, means you will not have business, and you might end up jobless………and if you still think spending is the right way to help the economy, then who is going to help you when you’ve spent so much but became jobless overnight?

    What you say is true. You need to depend on yourself as well as the system. That’s why I tell my friends to park up to 70% of every month’s paycheck into their savings account, if they can afford it. They can spend the 30% on essentials because there is a trickle effect that comes back to them in some form. This is in contrast to some advice I hear outside – that you must save 100% of your income and do not spend a cent if you can. The idea is not to go on either extreme.

  2. LC Teh permalink
    December 10, 2008 11:57 am

    The system supports itself. The wheels of the economy must keep turning. We have to maintain the things we own, to keep using them. We have to eat, run our cars, light our homes, use medication, etc. There is no way to stop spending.

    Because the bubble’s burst, we cut excesses. People stop borrowing to gamble. (Yes, borrowing to buy shares = gambling with other peoples’ money). Stop spending money they don’t have. The deadly cycle stops or cools down and corrects itself. Everyone feels the pinch and the pain. Those who live frugally, spend wisely will feel less pain.

    It’s like the landscape being cleared by a fire. Then the forest returns to life when new plants grow again, sustained by the seeds of the system.

    That’s how I see all this.

    Ah… live frugally, spend wisely. That’s a great statement on balance. Thanks. 🙂

  3. December 10, 2008 10:08 pm

    Agreed completely. I always tell this to others. Economy is like ecosystem. If everyone save their money instead of spending them, one day, we’ll lose our income.

    Yeah, when people panic they tend to go to extremes. The economy is really like a house of cards isn’t it.

  4. December 11, 2008 12:26 pm

    Money is merely an idea crystalized to allow us to exchange goods and services within our society. There’s no possibility of a person to avoid spending since we need co-operation in society to survive including food etc.

    IMHO, since economic crisis was not caused by the hoarding of cash, spending will not solve it either. It’s caused by excessive levels of debts and leverage. For me, I would spend wisely and remain calm.

    True, the collapse of Citi and Morgan Stanley was not caused by the hoarding of cash. Yet at another level, when hawkers and small traders close down halfway across the world, it shows how a weakened immune system will attract opportunistic diseases. So keeping retail money flowing will provide oxygen to that retail level although it will probably do nothing to save Citi and GM. So yeah, spending wisely is good advice.

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