Importance of Savings 2

On May 3, 2010, In Thoughts, By Ukey Hoo

This is a follow up of my previous post:- Importance of Savings

Today, an article published on yahoo was talking on the same issue, showing many instances of Americans who were deeply impacted by the recession, and may never lose their sights on frugality in their lives.  This is a sympton that had become predominant in the generation which survived the Great Depression, and was said to be a reason why the economic recovery after that was slow.

Personally, I’ve always been a frugal person.  It doesn’t matter to me whether I’m rich or not, I will still live a frugal life, though I do spend more now than I had before, especially in one time expenses like holidays.

I do believe that increase in savings does have an adverse short term impact on global economics, just as saving now will impact your current lifestyle.  However, in the long run, the impact is totally opposite of the short run.  With proper investment, you would get an increased income and hence potential for expenses in the long run.  Similarly, this would allow global economics to build at a sustainable level over the long run, which is why I do believe that this will be a good thing for us, as a global citizen.

ok, lets get onto the article taken from yahoo finance:-

Jeannine Aversa and Bernard Condon, AP Business Writers, On Sunday May 2, 2010, 1:42 pm EDT

Even as the economic recovery plods ahead, many American consumers are refusing to come along.

They’re not spending freely — and they have no plans to.

Many of them have steady income. They aren’t saddled by high debts. They don’t fear losing their jobs. Yet despite recent gains, they’ve lost so much household wealth that they’re far more cautious about spending than before the recession.

Their behavior suggests that the Great Recession may have bred a new frugality that will endure well into the recovery. And because consumers fuel about 70 percent of the economy, their tightfisted habits means the rebound could stay unusually sluggish.

That’s the picture that emerges from an Associated Press survey of leading economists and interviews with more than two dozen ordinary Americans. The new AP Economy Survey asked 44 leading economists whether the recession created a “new frugality” among consumers that will outlive the recession. Two-thirds said yes.

They had in mind people like Marjorie Feldman of suburban St. Louis, who retired three years ago as a systems analyst for a utility company. The stock investments in her retirement account have sunk 15 percent from 2007. The value of her home is down 20 percent.

“I had retired assuming I’d make money” off the investments, said Feldman, who’s in her early 60′s. “I just don’t feel as confident in the economy, and I never will again. I won’t spend money the way I used to.”

Feldman’s husband works full time in academia. She has a part time job preparing tax returns at H&R Block. But her prime earning years are behind her.

“I don’t think it will ever get back to where it was before,” she said of her nest egg. “I won’t spend money the way I used to.”

Scott Hoyt, senior director of consumer economics at Moody’s Economy.com, notes that baby boomers, in particular, enjoyed spending sprees for most of their adult lives as their assets steadily grow.

“But the recession changed that,” Hoyt said. “Many have retirement and children’s education looming. All of a sudden, they see their balance sheets decline in a way they’ve never seen before.”

To be sure, many shoppers, especially the wealthy, are buying into the recovery. Partly on the strength of consumer spending, the economy emerged from recession last year and has been growing steadily, if moderately, since. Major retailers logged solid sales in March. Employers have begun to add jobs, including a net increase of 162,000 in March. The stock market has risen 70 percent from its low in March 2009.

Yet many who became penny-pinchers during the recession are in no mood to start shopping again with abandon for clothes, cars and home additions. They’ve discovered the peace of mind that comes with rebuilding savings, shopping more prudently and learning to live with less.

At their nerve-racked peak last year, Americans socked away 6.4 percent of their disposable income. That compared with less than 1 percent hit at one point during the pre-recession boom. The savings rate has since dropped to 3.1 percent. Yet few expect it to approach the near-zero savings rate that would signal high-octane spending has roared back.

Susan Wilson, 55, a freelance PR specialist in Scottsdale, Ariz., says her business is picking up. But her spending isn’t. Wilson still feels burned by the recession, when she lost her home to foreclosure.

“Shame on me,” she said. “I wasn’t paying enough attention to my financial health. That will never happen again.”

Wilson is renting now. She traded in her leased car for a used car she could buy outright. She’s started growing her own vegetables and air-drying her laundry to save money and stay out of debt. She’s looking to buy a home, but not one with an outsize mortgage.

“I’m looking for pretty much the smallest house I can live in,” she said.

Interviews with ordinary Americans suggest a new frugality endures even though consumer spending has risen for five straight months and retail sales for three.

In the AP’s new quarterly survey, a majority of economists agreed that a new frugality will persist even as the recovery gains firmer footing.

“I would call it a ‘mini age of austerity,’” said Sean Snaith, an economics professor at the University of Central Florida.

“Consumers will not run up multiple credit cards to their limits, and when buying a house the objective will not be to get the maximum square footage for which they can afford the payment. A higher savings rate will be in place for several years.”

Jeff Thredgold, an economist at Thredgold Economic Associates, predicts “less impress-my-neighbor-type spending” in coming years.

Count Keith Flowers of Manassas, Va., in that category. He’s decided that the hit he took in the housing slump requires him to continue to rein in spending. He’s cut off his landline phone and has become a regular at discount retailer Costco.

He isn’t worried about losing his job in business development at an information technology company. What’s led him to cut back spending is the sunken value of his condominium. He bought it in 2005 for about $270,000.

“I doubt right now it’s cracking $100,000,” Flowers said.

Rajeev Dhawan, director of Georgia State University’s Economic Forecasting Center, says: “I think the chances of us being big spenders in the next 10 years are pretty low.”

So much household wealth was inflated by the housing boom, Dhawan said, that the real estate bust spooked consumers. States hardest hit by the bust — California, Nevada, Florida and Arizona — together account for about 30 percent of national economic activity, he noted.

Household net worth — the value of assets like homes, checking accounts and investments minus debts like mortgages and credit cards — has risen for three straight quarters. But economists say consumers would need a stronger and prolonged increase in wealth to lead them to ratchet up spending. Net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion.

Some economists put their hopes for the economy in the rich, who are spending more freely than the rest of the population. They hold out hope that this will encourage more hiring and stimulate spending by the less wealthy. More spending could increase companies’ revenue, which allow them to boost hiring and pay. And that would lead their employees to spend more.

Royal Caribbean Cruises Ltd. returned to a first-quarter profit as more travelers vacationed on its ships and spent more money on board. And makers of luxury goods are benefiting from a release of pent-up demand for jewelry, watches and high-end furnishings.

High-end retailers have reported blowout results. Nordstrom’s revenue in stores open at least one year jumped 16.8 percent last month. Saks’ surged 12.7 percent.

McClaren Automotive has announced it will debut a $200,000 sports car in the U.S. next year. And business is picking up faster at high-end hotels than at mid-priced and budget hotels.

Whether spending by the wealthy will cause the less-well-off to spend freely, too, remains unclear. For now, though, many people have embraced a more frugal approach to spending.

Or maybe they’ve just learned to go without.

Jan Iris Smith, 57, and her husband of Cabin John, Md., put off furniture and clothing purchases after the stock market’s collapse in early 2009.

“We were counting on our income from our investments,” said Smith, a psychotherapist whose husband is retired. “We just stopped pretending everything was going to be OK anytime soon.”

Aversa reported from Washington, Condon from New York. AP Business Writers Christopher S. Rugaber in Washington and Christopher Leonard in St. Louis contributed to this report.

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Importance of Saving

On May 2, 2010, In Thoughts, By Ukey Hoo

This period of economic downturn and possible recovery had given an important lesson to many people, especially those aspiring to be rich. One of the most important use of wealth is to be able to survive extended periods without working income, and this comes from having good cash flow investments using your savings.

The first thing to do, hence is to have savings. In fact, in my personal point of view, having a good cash flow will allow you to live your life the way you want, with or without your job. With a job, you can fill up your time doing things you love. Without a job, you can still fill up your time doing things you love.

However, the lesson learnt from this economic upheaval will probably be something that will be carried by those heavily impacted by this situation, and will be a source of experience to them.

Lets hope that this will be a valuable lesson that will help in their remaining lives!

The following article from The Straits Times shows some examples of people recovering from the economic turmoil, and is taken from this site

Importance of saving hits home
The economy is looking up, but how has life been for Singaporeans who were retrenched during the downturn last year? In February last year, in the midst of the recession following the worldwide financial meltdown, The Sunday Times launched a Need A Job column. We featured 42 people who were looking for full-time employment over the course of 21 weeks. One year on, we revisit three of them to see how they are faring. Jamie Ee Wen Wei reports.

Laid off in 2008, Ms Ophelia Lim now works as a merchandiser for a shoe chain. She lost $20,000 in a business venture with a friend.

It has been a rocky time for Ms Ophelia Lim. She got a job, then was told to go on no-pay leave. So she went into business with a friend, but lost $20,000 when that venture failed. Then, she got ano- ther job but quit after three weeks.

In late 2008, she was laid off from her job as a fashion merchandiser when her company shrank its operations. She had been there for three years and was earning about $3,000 a month.

When she was featured in The Sunday Times in February last year, she had been jobless for three months. Within a month, she was hired as a merchandiser by a fashion house. The job sounded promising. She would help the company develop its business at its factory in China while based in Singapore, and could try her hand at fashion design. Her pay was about $2,500.

But barely one month into the job, her employer told her to go on no-pay leave for six months. She took it as a cue to leave.

‘I think it ran into some financial problems but I didn’t call them to ask. There was no point because I had been working for only a few weeks,’ said Ms Lim, 38.

Then came her lowest point – in September last year. She went into business with a friend and lost $20,000. They had set up a shop selling potato salad and sushi in Bishan. But within three months, the business folded when her partner pulled out suddenly.

‘I was having so many sleepless nights. I didn’t have a job at that time and all the money was just going down the drain.’

She resumed her job search, but did not hear from most of the companies she sent her resume to.

In February this year, she was hired by a firm to sell electronic components. But she quit after three weeks as ‘it was too manly and too technical for me. I couldn’t see myself doing it for long’.

The financial instability meant that her family had to cut back on extras. The divorcee lives with her three sons – aged 16, 11 and 10 – and her mother in a four-room flat in Toh Guan.

They cooked and stayed home during weekends. They also had to forgo celebrating special occasions like birthdays. ‘There’s no extra to buy presents, just a cake,’ she said.

But things are looking up. Last month, she found a job as a merchandiser at shoe chain Chocolate Schu Bar through a newspaper advertisement.

She has taken a 20per cent pay cut from her original fashion merchandising job, but she is not complaining. She says she is in a better state than many of her former colleagues in the fashion merchandising business, who are still jobless or taking low salaries.

‘I’m lucky because the difference is just a few hundred dollars,’ she said of her salary now.

Having survived the recession, Ms Lim, who has A-level qualifications, said the biggest lesson she has learnt is the importance of saving for a rainy day.

‘It really hit me hard,’ she said. ‘My savings ran out within a few months. So now, even though I’m earning less, I make sure I save at least $50 a month.’

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