The New Frugality

Chris Farrell From chief economics correspondent Chris Farrell

The Great Recession was still in full force for much of 2009 when I wrote The New Frugality. The book came out in January, 2010 and by then we knew that the recession had been the longest, deepest, and most punishing downturn since the 1930s. Very few people were left unscathed by one or several of the following traumas: unemployment, pay cuts, slashed benefits, cuts in hours worked, declining home values, foreclosures, short sales, and bankruptcy.

People adapted to hard times by changing their lifestyles to consume less and put more money into savings. Households worked at paying down their debts, too, from second mortgages to credit cards. Thrift was in and profligacy was out.

Of course, the question was always would the changes in everyday behavior and financial values last. Or was the embrace of frugality simply a practical response to bad economic times? Sure, folks clipped coupons, held off buying bling, and searched for bargains. But these were thrifty tactics to toss aside as soon as the economy revives. When the good times rolled the credit cards would come out and wants would be once again rationalized as needs.

My argument is no. The Great Recession marked a watershed in household behavior. That even when the economy came back the experience of the past three years was searing enough that folks wouldn’t get as debt-extended and savings-starved as before. Even more important, wage gains over the past three decades have been anemic after adjusting for inflation. Financially vulnerable households weren’t about to take on debts like before. Another major theme was that sustainability was going mainstream and that during the Great Reccession more and more people learned that being green and frugal reinforced one another. .

The latest evidence that Americans are changing their personal finance habits comes from a Pew Research Center survey, A Balance Sheet at 30 Months: How the Great Recession Has Changed Life in America.

It found that the Great Recession had “fundamentally changed borrowing, saving and investing habits of the American public–now and quite possibly for a long time.”

The survey results are fascinating. And the title for the section on managing money? The New Frugality.

The people surveyed by Pew certainly cut back on their spending; they borrowed less; and they don’t plan on boosting their borrowing much even when the good times roll.

Pew on borrowing future.png

There’re a lot more to the survey. For instance, it shows that Americans don’t expect home values to rebound anytime soon; that many expect to delay retirement; that there has been a downturn in expectations for a decent retirement; and, perhaps most importantly, that they’re very worried about their children’s economic prospects. Fewer than half of surveyed adults believe that when their children are their age that they will enjoy a higher standard of living. Indeed, 26% say their children’s standard of living will be lower, up from 10% holding that opinion in 2002. Yikes!

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