Until recently Shannon Palmer,
like many Americans, spent money freely. She assembled a nice
wardrobe, took four vacations a year, and ate out often. But
now, as she listens to economists discuss the likelihood of a
recession, she recognizes the need to get her own finances in
order.
"I'm young and I feel mostly
secure in my job, but I have a good deal of debt on my
back," says Ms. Palmer, a publicist in Andover, Mass. As a
step toward fiscal responsibility, she has begun a "very
aggressive" plan to pay off student loans, a car loan, and
credit-card bills. She has also started to save.
"This is a time for action
when it comes to people taking responsibility for their personal
finances," she says. "This is just the motivation I
needed. It's forced me to look at things differently."
Looking at things differently is
a theme running through conversations of Americans at all income
levels these days as they review their spending habits. Nearly 2
out of 3 consumers intend to reduce indulgent spending in 2008,
according to a new survey by HSBC Bank USA. Four out of 5 want
to increase the amount they save.
"Even at the top layers of
luxury, there has been some softening in spending," says
Milton Pedraza, CEO of The Luxury Institute in New York. That
includes yachts, jets, cars, and additional homes.
Among those who do not dwell in
that economic stratosphere, the new prudence is often a
necessity, stemming from uncertainty about jobs, high fuel
costs, heating bills, and the price of healthcare. For others,
like Palmer, it is voluntary and represents, at least in part, a
shifting of values. They regard an economic downturn as an
opportunity to reassess their priorities.
"It's a good wake-up call
for a lot of people, that the good times don't last
forever," says Kim Danger, founder of Mommysavers.com.
"People realize they don't need an expensive lifestyle to
focus on the things that really matter."
Palmer's wake-up call began when
she tracked her expenses and made a sobering discovery. "I
spent a lot of money on very pointless, unneeded things,"
she says. That included $3 every two days in a vending machine
at work, regular visits to Starbucks, and social lunches.
To cut back, she has drastically
reduced what she spends on clothes. She is learning to do her
own dry cleaning. She has also canceled an annual trip to
Florida and another to the West Coast.
"I didn't want to sacrifice
my comfort, but I wanted to cut back on the luxuries,"
Palmer says. "It feels really good to finally have sanity
when it comes to my finances. I don't have to constantly be
worried about going overboard."
This new fiscal awareness has
also spread to her friends. "We have started to discuss
economic things," Palmer says. "It's definitely more
of the social conversation than it ever was before."
Living beyond one's means is
hardly a new issue. "Americans have been dealing with debt
for a long time," says Ronald Wilcox, author of the
forthcoming book "Whatever Happened to Thrift? – Why
Americans Don't Save and What to Do About It." "Some
of the Founding Fathers were famously in debt, like
Jefferson."
Americans' innate optimism adds
to the challenge. "One consequence of being overly
optimistic is that people think tomorrow is probably going to be
better than today," Mr. Wilcox says. "So they don't
save."
It took a layoff five years ago
to teach Christine Pietryla the importance of saving. "I
wasn't prepared and I went into panic mode," she says.
"It was definitely a defining moment. I had not been very
prudent. It was a smack in the face, but it was a lovely smack
in the face because it ended up setting me on the right
path." She now runs her own public relations consulting
business, Pietryla Enterprises, in Chicago.
These days Ms. Pietryla is taking
another look at her finances. Rather than feeling deprived as
she trims expenses, she feels more free. "I'm trying to
approach it as a lifestyle change, as opposed to a
sacrifice," she says.
In addition to cutting back on
Netflix, iTunes, and a daily latte, she buys only what is on her
grocery list, avoiding impulse purchases. By consolidating her
cellphone and home phone carriers, she was able to negotiate a
better price. "I'm also very careful about bank charges and
late fees," Pietryla says, noting that last year they cost
her $140. "I'm getting rid of that." She is keeping
her workouts with a personal trainer. When she goes out with
friends, they often do things that don't require a lot of money.
Michael Boss, a manager at MPC
Computers in Boise, Idaho, regards this kind of revision as
essential.
"I don't want to see people
out of work or unable to make their mortgage or rent payments,
but I do think that collectively we need to recoil from the
materialism that has come to define this culture," he says.
"Spiritually and environmentally, there are all these
reasons we should do more with less and not feel as though not
having all these material things is an abrogation of our
birthright as Americans."
He and his wife have cut back to
one car. "I drop her off at her office and then go to
work," Mr. Boss says. "We scaled down the size of our
home after our children left. We've reduced our mortgage."
Although they could afford a
40-inch television, that's not a priority. "We don't feel
that we have to have every new gadget or gizmo. We just don't
move in circles where you're out of the loop if you don't have
the right toys."
That's the attitude Bob Glantz
takes toward cars. He saves money by buying used vehicles that
have been checked over by a mechanic. "The most expensive
fragrance in the world is not Chanel No. 5 or Opium or White
Diamonds, it's that new car smell," says Mr. Glantz,
research director at Access Communications in Berkeley, Calif.
Three layoffs during three
recessions – in 1981, 1987, and 1991 – taught Glantz the
importance of putting money aside when paychecks are coming in.
He advocates maximum payments to a 401(k), if possible.
He charges everything he can to
an airline miles credit card and earns free flights. "My
wife and I have taken a couple cross-country trips," he
says.
They also enjoy inviting
neighbors over to play cards and Scrabble. "You can have
very good times at home for very little money," he says.
Emphasizing that they do not have a "sackcloth, ashes, and
gruel" lifestyle, he adds, "You can do things to be
frugal without hardship."
Stacy Francis, president of
Francis Financial in New York, finds that many of her clients
are "digging a little more deeply in their soul,"
asking whether their spending really reflects their values.
"For most people, where
they're spending their money has little or no correlation to
what's really important to them," she says. "They're
really surprised at the amount they're spending on things that
don't really matter, that don't add to their happiness."
To help people achieve financial
security, Ms. Francis suggests a five-step plan:
First, conduct a full analysis of
where you're spending your money. Second, list what your real
values are. What is important in life to you? Third, look at
whether your spending reflects your values. Fourth, change your
spending to bring it in line with your goal of achieving
financial security. Fifth, evaluate your finances every six
months to be sure you are on track.
In general after a recession,
patterns of spending and saving vary widely by age and stage of
life.
"When things get better,
those in an older generation are more likely to continue to be
prudent, because they know it can be lost in a minute,"
says Alice Simon, professor of economics at Ohio Wesleyan
University. "Those in a younger generation are more likely
in good times to continue to spend. They've never really had to
suffer."
Even so, when the good times roll
again, Palmer hopes to maintain her financial goals. Pietryla
expresses similar determination.
"I just feel better,"
she says. "My stress level is less intense. I'm focusing on
that shift in values. I'm prepared if anything happens. It's the
best sleep I've ever had."
