Personal Finance

Thrifty by nature is not a term I'd use to describe the consumer nation these days. In his article The American Apostle of Thrift, David Blankenhorn suggests that Americans today have lost touch with the wise teachings of men like Benjamin Franklin. He contends that if folks dig a little deeper into Franklin's words they would find a very different interpretation of what it is to be thrifty.

The definition of thrift is more vague than a literal textbook defition. Does it mean getting more bang for the buck, more life out of your engine, or a lot of stuff for free? To some being thrifty is often equated with being a tight wad. In fact, most people who are thrifty think twice before plunking down serious cash, and in some extreme cases a very small sum of cash also. Thrifty people often haggle with merchants and friends, trying to get a good deal. They can become almost belligerent when someone mistakenly doesn't give them the discount they deserve. But aside from all of these things, is it so bad to be thrifty?

In today's age of modern excess, it's often believed that only the poor or unwealthy take time to shop around and try to find good deals. With luxury items becoming more the norm for many families, young and old alike perceive that quality and novelty come at a premium. It's no wonder that folks who are willing to pay these premiums all too often find themselves on the wrong side debt to equity equation.

This hasn't always been the case however. In the days of Benjamin Franklin, folks had very little to spend, and even less to spend it on. Most of a week's wage went toward the necessities of life in early America: food, clothing and tools. Luxury items like those from Europe were viewed as affordable by only the elite. At best the typical American could only hope to scrimp and save a small sum that someday they may free themselves of the burden of the bank. In those days Franklin wrote of the values of saving in his publication Poor Richard's Almanac, and for a time folks heeded his words.

While the words that Franklin wrote stating "A penny saved is a penny earned", the statement should have been followed up by the warning "A penny borrowed is two pennies spent". Perhaps it could have alerted people to the dangers of borrowing beyond your ability to repay. In some cases folks don't understand the true costs of borrowing, even those with business degrees. Some would say that if they purchase something with financing and eventually pay it off, they will only have paid out the original cost of the item, plus the financing fee. However this ignores the opportunity costs of the money that was paid as a fee.

In some ways money is like energy. Money that you have saved is like potential energy, which can be used at your discretion. When you spend money on something it is akin to kinetic energy (energy of motion). For a given expenditure you can accomplish a given amount of work (i.e. you can purchase goods or services). However, once you've expended that money it is gone, and in return you are left with your purchase. The problem is that if you apply your capital to a service such as financing, once the transaction is finished you have no additional property other that that which you'd have owned already given the base price of the item.

This may work when you want to buy a new coat or a hat, but few people have the discipline to wait until they save enough to purchase a car or a home. In many cases they need the item NOW, for various reasons. This immediacy is another value factor in the equation. This is how financing works, and typically the transaction are fair for everyone involved. You get your item, the seller gets their money, and the intermediary gets a small fee for the service. Sounds like a win-win situation for everyone, right?

Of course, but there are situations where the balance can be shifted. In the case of consumers, the shift in power occurs when desires and needs outweigh the ability to repay them. Thrifty folks will apply the simple test of "If I can pay for it in x number of months, then reasonably I can afford to finance it to have it now). The problem is that careless consumers won't think the situation through this way and some are even so reckless to believe that this is the ONLY way they can obtain the item. In some cases buyers have no realistic intention of paying back the value of the item, and see financing was a way to merely rent it.

The problem is that the value of this depreciating asset often means that when they try to resale the item, they won't be able to sell it for the price they originally financed, thus owing more money than they have cash to pay for. In some cases all they will be left with is debt, which is simply added on to the next item they purchase. Because of this it's possible for people to actually pay off their debt and still have no assets to speak of.

Somewhere Ben Franklin is rolling in his grave, especially given that some economists believe that consumer spending is fueling our economy. This spending is largely driven by growth in available credit and not increased take home pay. At some point creditors will lose the ability to increasingly allow some consumers to put themselves in hock. But until that happens it's likely that buyers will continue to take advantage of the situation.

So why bother being thrifty? If I can spend now and never pay it back why shouldn't I? The problem is that eventually all debts come due. In most cases debt passes on to your estate when you die. The balance of your assets vs. your debt results in whatever your inheritors get. The problem is that if the debts far exceed the assets, your family could be stuck with a mountain of debt, in which case there are only two real options. The first is to assume the debt, refinance and continue to keep property such as houses, land, etc. The second is to refuse the inheritance, whereby everything goes on the auction block and you loose your rights to everything.

The other, more nightmarish scenario happens when you can no longer make your minimum payments, called servicing your debt. When this happens you'll start to get collections notices and angry phone calls. At this point your only option is to seek legal council. Eventually you'll either have to formulate some payment plan, or declare bankruptcy. We could devote an entire article to this, and there are those that are more knowledgeable about the subject than I.

The good news is that it doesn't have to end this way. By following the simple, and time tested advice of guys like Benjamin Franklin you can help yourself avoid just a terrible end. Even more, the government has set up several ways for you to actually save money and get ahead. In many cases this money can be used for future expenses like your first house, college tuition and even retirement. But the time to act is now. Then sooner you start to get your finances under control the further ahead you will be in the end.