Should You Save or Spend in an Uncertain Economy? It Depends

During this period of polarizing politics and uncertain economic headwinds, it’s understandable that people are tempted to sock away their savings inside a mattress and ride out the tough times. Pixabay

If the 2016 presidential election reaffirmed anything, it’s that the country is sharply divided. We might live in the United States, but there’s relatively little unity politically, financially, or culturally.

People generally view this rift through a political lens, though it extends to economics — specifically consumers. On one side, people unsettled by the political and financial environment either support or boycott companies on the basis of alliances. On the other side, Americans buoyed with newfound confidence in the economy and stock market see a buyer’s market.

It’s no coincidence that individuals with disparate feelings fall on different ends of the political spectrum. A recent Bloomberg survey noted Americans are generally satisfied with the state of the economy and their personal finances, though their economic outlooks are split along party lines; 87 percent of Republicans expect continued economic gains in the next five years, but only 22 percent of Democrats feel the same way.

Federal Reserve Chairwoman Janet Yellen’s recent statements to Congress have only furthered the confusion. Yellen acknowledged business confidence and investment had improved, but she said economic challenges loom on the horizon. She mentioned modest manufacturing output and housing construction, which respectively stem from weak foreign growth and higher mortgage rates.

During this period of polarizing politics and uncertain economic headwinds, it’s understandable that people are tempted to sock away their savings inside a mattress and ride out the tough times. Consumers might be squeamish, but that doesn’t mean they should avoid spending money altogether. A complete shutdown of economic activity could set off a disastrous domino effect.

Consumer Spending Is Key to the U.S. Economy

Consumer spending is crucial to any nation’s economy. The United States is no exception: It accounts for roughly two-thirds of the country’s economic growth.

By forgoing large purchases, people are exacerbating economic problems rather than improving them. Whether it’s a new home, vehicle, or appliance, every purchase that consumers make creates a ripple effect on the economy. The money is reinvested in local businesses, with profits allowing companies to take care of their employees.

When dollars aren’t moving in a community, businesses pay the price. Companies fail to reach their profit margins, which can cause them to limit raises, skip bonuses, and sometimes lay off members of their workforce. Consumers who stop spending end up hurting themselves and their communities in the long run.

In this way, a slowdown in consumer spending is a lot like a drought. These natural phenomena don’t always appear to be as devastating as hurricanes, floods, and tornadoes, but they can create incredible destruction. The National Oceanic and Atmospheric Administration estimates that drought causes annual losses of about $9 billion. Farmers lose money from failed crops, and consumers end up paying more for dairy, produce, and other agricultural goods because of the reduced supply.

If consumer spending suddenly dries up, everyone pays the price. The best way to keep the economy strong is to encourage people to spend money on goods and services — particularly big-ticket items.

How to Know When It’s Safe to Spend

You need to be confident in your personal finances and the surrounding economic environment before you make any significant purchases. With this in mind, it’s particularly important to look at your financial plan and budget to determine whether you should hold on to your cash or spend freely. Before making a major purchase, consider:

What’s your career outlook?

Examine your economic environment and its stability. Your career outlook is a great place to start. Is your profession in high demand? Is your company expanding? Is there any risk of layoffs? It might sound like chronic worrying, but it’s important to ask yourself these questions to ensure you’re not caught off guard.

Depending on your career path, you might also want to look at factors that could affect your employment. If you’re in an industry that relies on something as unpredictable as the weather, for example, make sure you have a fallback plan in case things go awry. Consider the potential of tight government regulations or high taxes, which can both stifle business development.

What does your family’s future look like?

Once you’ve thoroughly assessed your career outlook and company finances, it’s time to take a long, hard look at your family’s economic forecast. Are you and your partner planning to have children in the near future? Do your parents have plans to retire, or are they experiencing any health issues? Are you setting aside enough money for your own retirement?

Take time to expect the unexpected. Are there any major repairs you might have to make to your car or home? Do you anticipate medical visits in the coming months? Think things through, and be honest about your situation.

How much do you have in savings?

It’s always important to have savings, but this is particularly true in an uncertain economy. Droughts are beyond our control, but that doesn’t mean we shouldn’t prepare for these natural disasters. Consider any potential calamities that could strike in the coming year, and make sure you have enough money squirreled away to ride out unexpected setbacks.

Prepare for a figurative rainy day so you’re safe if it spirals into a severe thunderstorm. A good rule of thumb is to save somewhere between three and nine months of take-home pay in an emergency fund.

After examining your immediate environment, you should have all the information you need to determine whether a big purchase fits into your budget. If that’s the case, spend away. If it doesn’t seem like the best idea, spend some time — and money — building up your savings. Regardless of your choice, taking control of your own financial direction and doing some solid research should give you the peace of mind to deal with any chaos the world throws your way.

Darin Namken is an entrepreneur who co-founded CreditSoup in 2000. He serves as CEO, steering the mission of the company and specializing in new business development. CreditSoup was founded as a borrower’s marketplace for consumers seeking various financial products, providing people with information and credit solutions to meet their needs.