Please take the following short quiz, answering each question with a simple yes or no:
- Is your household income about the same as or greater than it has averaged over the past few years?
- Is your job reasonably secure?
- Are your financial obligations -- mortgage payments, car payments, school tuition and other family expenses -- about what they were last year?
- Are you saving about 10% of your gross income for all of your future needs combined -- emergencies, retirement, the kids' college, a major purchase?
If you answered yes to those four questions, you are among the fortunate folks who are faring pretty well despite this severe economic downturn. And kudos to you for managing your career and your finances wisely. (If not, see these nine steps.)
Because you are both fortunate and wise, Uncle Sam wants you to play a key role in America's economic recovery. How? By maintaining your normal levels of consumer spending and charitable giving -- and, if possible, even increasing them a bit.
Acting as you normally would will help offset belt-tightening by those in genuine distress, who have no choice but to cut back, and by those who aren't in trouble but are cutting back anyway.
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Reasonable response
Why are some people slashing spending even though their incomes are secure? One reason is a drop in their net worths, due to eroding home prices and financial assets.It's the reverse of the so-called wealth effect, which caused people to spend and borrow more freely in boom times, confident that their net worths would keep rising unabated. Now, with their wealth declining, people are acting more cautiously even if their incomes haven't been cut. That's a reasonable response. Unfortunately, overdoing it will aggravate the economic slump.
Another psychological factor is at play here: a desire on the part of well-off Americans to show empathy for their less fortunate brethren by spending less. It seems that voluntary frugality is now as chic as high living was during the credit bubble in the middle of this decade. Nowadays, people who are still reasonably affluent are boasting about pinching pennies, eating at home, canceling trips and hanging on to the old car.
But I have news for them: If they really want to help individuals who are less fortunate, they should be doing precisely the opposite. Boosting their spending -- and their giving -- will help businesses forestall some layoffs and eventually put people who have lost their jobs back to work.
Continued: Keep your spending sensible, though
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