Maintain a good spending pace, don’t inflate your spending during a healthy economy
The economy is doing incredibly well. The securities market is on fire and the housing market is stronger than ever. There are plenty of jobs and going into the summer, many graduates from higher education are optimistic that they will have new gigs waiting for them.
Traffic outside my little tiny condo has picked up. There are a ton of construction trucks crowding the asphalt. Within three square miles, there are over a dozen apartment complexes going up.
Real estate investment website are all the talk and as hot as robo-advisers just 3 years ago. Angel investing and venture capital funding is only increasing.
Physicians are making fat dough and there is no end in the hiring blitz for nurses and other ancillary staff. Medical groups are opening new buildings, upgrading MRI machines and investing in more infrastructure.
Tesla’s are leaving the showroom floor in unprecedented numbers. Sporty Chevy and Ford trucks are everywhere, spewing mad diesel smoke as they pull away from the stoplight.
Banks are giving out mortgages at rates before the housing crash. Variable rate mortgages, interest-only and ARM loans are once again crowding the advertisement pages.
When the economy is doing well…
When the economy is doing well the average household starts letting their guard down. They start spending more and they save less. They slowly shift from their fearful saving ways to upgrading cars, buying homes and looking for better-paying jobs. They even start looking at riskier investments because their net worth looks sexier than ever before.
In the above graph, more households believe that the stock market will be even higher one year from now.
Those who don’t have much money at all and have the most fragile of financial situations look at the job market and think to themselves “why not take some time off, jobs will be readily available when I’m ready to resume work”.
I see a lot more cars which seem to be newly purchased. I see a lot of electric cars. I see a lot more cars which have recently been washed. More of my friends are hiring maids and ordering from Blue Apron.
More patients are telling me that they are stressed because they are buying new homes. I recall the same back in 2006-7 when everyone was ‘stressed’ because they were buying a new car, a new home, and timeshares.
More and more are asking for off-work notes. From 2008 until about 2013 I rarely recall giving out work notes. Now, it’s no big deal, there are ‘plenty of jobs’, what’s the problem with missing a few days.
The nurses I work with are going on exotic vacations. Even the rich are splurging. I am seeing brand new Lambo’s, Ferrari’s and more Maserati’s than I ever before.
Not to be a killjoy but…
I know, it would be depressing if we had to hold back all elective spending when everyone around us is enjoying the bounties of a booming economy. But that’s not what I’m trying to say here.
You should always base your spending on how secure your household finances are as well as the health of the economy.
Here is a sports analogy. When you are at the top of your game, with all the energy you can handle and feel super strong then it’s easy to push yourself too hard and get injured – I’ve done this plenty of times in the past.
In the personal finance world, it’s easy to get lulled into a false sense of security thinking that however things are now will be how things will continue on for the foreseeable future.
With a healthy and realistic budget, you should know how much money you can spend on fun/elective things and how much you should be spending towards your financial goals.
It’s natural to slip every once in a while, especially when the economy is doing so well. We may splurge on a better vacation and maybe spend a little to paint the attic. These are benign.
However, taking out a large loan to renovate the entire basement, buying a new car, spending $11,000 on a vacation or get the plastic surgery you always wanted, those are the moves which will lock in a loss.
Secure Income – Insecure Value
It’s very easy to earn a $300k salary and lose $100k of buying power without even noticing it. The US economy is very good at shifting the focus, delaying the financial hit and pacifying the public.
While inflation numbers will be advertised to be quite low, the cost of many items have dramatically increased. After all, inflation shouldn’t just be a number, it’s a reflection of the value you lose on the dollars you spend.
Certain prices which have been kept artificially low such as groceries, gasoline, water and taxes, may suddenly catch up to a more realistic price. The consumer often finds a way around such sudden bumps, but you don’t want the value of your assets hurt by such bumps.
Don’t inflate your risk tolerance
A few years ago most professionals would not consider investing in crowdfunding real estate deals. They wouldn’t consider getting in on IPO’s or putting their money into other highly speculative investments.
It wasn’t too long ago that private physicians had their malpractice raised so absurdly high that they had to shop around for States with a better malpractice environment.
In this kind of well-performing economy, many will look for better returns, especially after getting stung by this year’s double-digit rates of return from something as benign as an index fund.
I want to encourage my fellow professionals to continue investing according to their initial risk tolerance. Don’t halt those investment contributions, keep sending a little towards your index funds or conservative real estate investments regardless of how well the economy appears to be doing.
Maintain a good pace
When professionals work too hard they can burn out. And when we get excessively frugal we can burn out from saving and not spending enough to enjoy our abundance.
When the economy is as hot as it is now then enjoy the amazing returns but continue to contribute to your retirement. Try to ignore the new investment products that come on the scene promising much higher returns. However, if you are well on track, it might be okay to contribute a small amount, some play money, towards such endeavors – but don’t change your investment strategy.
If the economy tanks, don’t despair. You didn’t make a bad decision when you were investing in solid index funds during the high times. It’s the nature of the economy to go up and then down, and back up.
Maintaining a good pace means that you will continue to invest even when the economy does poorly. I finally got around to asking my financially savvy friends what they did during the 2001 and 2008 economy crashes and they said that they held the course – they kept adding to their investments and ignored the hype. They are glad they did.