How To Save And Spend To Boost The Economy

For as long as the recession has lasted, there has been advice doled out by seemingly everyone to overcome it. While some insist that it is important to save money, others believe that spending will, in turn, boost the local economy. What to do?

Today, Brenda Bouw of The Canadian Press explores this conundrum that she says economists call “the paradox of thrift”. This is a state by which saving too much money can actually “lead to an overall drop in consumption and threaten a nation’s economic growth.”

As CIBC World Markets economist Krishen Rangasamy points out in Bouw's article, people natually feel most comfortable spending when times are good. When a recession hits, the mindset changes and most people consider saving for the future. The unfortunate ramification of this practice is that consumption drops, contributing to a weaker economy and greater job loss.

This, of course, raises a number of questions. How can one expect to save money while being encouraged to spend? What is the perfect balance between saving and spending that will help the economy while not going broke yourself?

According to Rangasamy, “zero per cent savings is not good and neither is 40%.” BMO Capital Markets economist Douglas Porter offers advice that is just as vague saying that “there is no 'magic number' when it comes to how much Canadians should save and spend.”

Porter suggests, however, that one's saving and spending habits should be predicated on his or her own individual lifestyle. A retiree, for example, does not need to save as much while a young adult who is just starting out has to be careful with spending because he or she will have large expenditures.

Bouw's article also warns that the type of spending one does can have adverse effects on one's financial situation. Be careful of credit, says Laurie Campbell, executive director of Credit Canada.”That’s what got us into this mess in the first place.”

Bouw relays what Campbell offers as what is probably the most sound advice for anyone: “There is nothing wrong with spending money, but only if you can afford the purchase and you planned and researched it ahead of time.”

“When unplanned purchases become impulsive, that is when it’s not okay to spend,” she said.