- We're always told to be responsible and save our money.
Don't spend it on things that you don't need,
like designer man purses, a raincoat for your dog,
or a pair of nunchucks that say Supreme,
because that's just not smart.
- You're not really wearin' that, are you?
- Wearin' what?
- The man purse.
- This is not a man purse.
It's called a satchel.
Indiana Jones wears one.
- But the spenders in society are essential for me and you
to build our long-term wealth, especially for those of us
who are pursuing financial independence or early retirement.
In this video, we're gonna talk about why savers and anyone
trying to build wealth actually need those people
who are mindlessly consuming products or services
that they could probably do without.
Hey, I'm Jarrad with an A, and on this channel we talk
about all things personal finance, investing,
and we try to have some fun in the process.
Who would've thought that saving and spending less money
is bad for the economy?
Well, we're seeing right now what happens
when a large portion of Americans spend less money.
The US savings rate jumped from 8%
in February of 2020 to 13.1% in March,
which marks the highest it's been since 1981.
For all of my math people out there, we haven't seen
these kinds of numbers in 39 years, almost the same
amount of time since I've been in love.
The more you save, the less you spend, and we're seeing
what that's doing to our economy.
As of the first quarter of 2020, the United States economy
is no longer growing.
Now even worse, it's actually shrinking.
It was just reported that GDP fell by 4.8%
in the first quarter of 2020.
That number is probably off by a little bit due to how
they gather this data, so I'd actually expect it
to eventually adjust to something worse than 4.8%.
The only reason that gross domestic product matters
for this conversation is that it tells us something
about how we spend our money since it gives us insight
into the health of our economy.
We'll talk about why this matters to you in just a minute.
But it gives us that insight through measuring
four different things.
Consumer spending, so basically the total value
of anything and everything normal people, like you and I,
spend their money on.
Business spending, government spending,
and the net value of exports.
So the value of everything the United States exports,
minus the value of everything the US imports
from other countries.
Because exports add to GDP,
while imports take away from GDP.
The US hasn't been good with the imports exports side of GDP
since we've been in a deficit in that area since the '70s.
But even that only makes up about 5% of overall GDP.
A lot of businesses have also been shut down,
so a portion of that spending has completely disappeared,
which lowers GDP as well.
Even some of the ones that are still open have been forced
to reduce their spending just to stay afloat.
But as of 2019, business spending only makes up about 18%
of total GDP.
Now that's only about 1/5 of GDP, which is a drop
in the bucket if you think about it.
Where we've really taken the biggest hit is
in consumer spending, which actually accounts for 70%
of gross domestic product.
Now think about that.
If we, as consumers, aren't spending more and more money,
then the economy isn't gonna grow, which means our economy
isn't very healthy.
So let's look at the four reasons consumers like us
aren't spending as much money right now.
Then we'll look at the real effect of spending less money.
Fear is extremely powerful when it comes to getting us
to do something and to not do something.
At this point, a lot of people who still have jobs
are fearful of their financial future since there are
so many unknowns.
They see the unemployment numbers skyrocket to more than
30 million and wonder if they're gonna be next.
This is causing people to spend less of their disposable
income on over-priced items like a pair
of stupid Ray-Ban sunglasses, and instead,
set that money aside into savings just in case.
Fear is probably gonna play a part in how we spend our money
at least for a little while.
Many people are gonna second guess whether or not it's
worth it to hop on that airplane or even go
on a cruise ship, which I don't know who went
on cruise ships to begin with, because they're like
germ-infested metal vehicles that fly across the ocean,
but that's besides the point.
Or even risk going to events where there's
large groups of people.
This could possibly affect us when it comes to spending
in this same type of way older folks hide cash
all over their house.
In case you weren't aware, they were scarred
by what happened in 1930, when Americans lost trust
in the banking system.
So they tried to withdraw all of their money
from all of their bank accounts.
Well, that wasn't a good thing because it turned out
that those banks didn't have enough cash on hand to give
to everyone who wanted to liquidate their accounts.
It was a mess, and now it makes sense why we hear stories
about cleaning out Grandma and Grandpa's attic
only to find cash stuffed away in the most random places.
I actually remember a friend mentioning this sort of thing,
I don't know, a couple of years ago, maybe three,
four years ago.
Her grandpa had passed away, and while they were
cleaning out his house, they found wads and wads of cash
all over the place.
I think it added up to about $50,000 in cash that he had
tucked away all throughout the house.
If you haven't done it already, please Hulk smash
that thumbs up button.
The next reason consumers are spending less is due
to a pay cut that they were forced to take at work.
It's common sense.
If you don't have the extra money, then ya can't spend
the money, unless, of course, you're someone who likes
to use your credit card to charge more than you can afford,
which I think is stupid anyways.
But, Jarrad, you can't take it with you when you die,
so I should spend all of money and then some.
Okay, we'll talk in 10 years to see how your finances
are doing, because you're most likely not gonna be dead.
I've personally been forced to take a salary cut
for a short period of time and I know others who have had
their hours reduced, so their employer's able to weather
this financial storm that's going on right now.
Now I'm sure that there's some companies out there
taking advantage of this time to use the health crisis
as an excuse to reduce overall salaries, but let's just
play pretend and assume that 99% of 'em are doin' it
out of necessity.
Consumer spending is also down because unemployment
is on the rise.
There are many people currently collecting that money
who are earning less than if they still had a job.
On the other hand, there are 36 states where people who are
currently on unemployment are making more money
by not working than if they were, because of that $600
per week stimulus from the federal government.
According to a Gallup Poll, it looks like there's gonna be
a decent amount of individuals using the money to pay bills,
using the money to spend it on essentials,
and using the money to save it as well.
We can only hope that anyone who is making more
from unemployment is setting the extra money aside,
but who actually knows.
Another reason spending is down is that when you're
locked up in your house more than usual,
there's less opportunity to spend the available cash
that you have just sitting around.
As the weather has gotten nicer, you can't spend your money
on things like live concerts, vacations, restaurants,
live sporting events, gyms, or even theme parks
and the list goes on.
To understand what really happens when we spend less
and save more, we can actually look at something called
The Paradox of Thrift.
This economic theory says that when consumers
spend less money, the economy will naturally shrink.
When the economy shrinks, we see more people lose their jobs
since there's no need for them any longer.
When you are in the process of pursuing financial
independence or early retirement, by saving more money,
then the last thing that you need is for your job
to be in jeopardy.
Let's do a little thought experiment.
If everyone decided to increase their savings rates
to the one that I currently have, which is 70%,
then that means that we would be spending 70% fewer dollars
at local and national businesses.
The same businesses that employ everybody and pay everybody.
If those businesses across the board see sales drop by 70%,
then they won't be able to continue paying the wages
of their current employees since 70% of their business
just disappeared over night.
One solution for businesses would be for them to lower wages
across the board or even reduce the number of hours
that everyone works.
But I highly doubt that anyone would be okay with basically
having their salary cut forever.
We'd most likely see more and more businesses shutting down
all over the place.
All of this would cause our economy to shrink since everyone
is trying to save more money.
In a perfect world, we'd see new businesses popping up,
which will take the place of the ones
that are now shut down.
But if people aren't spending money, then there's gonna be
fewer new businesses being created because people don't
wanna spend their money anyways because they're trying
to increase their savings rate.
Even knowing how important it is for everyone to spend
more money to help the economy, I still wanna encourage you
to save and invest as much money as you possibly can
because I have a little dirty secret to share with you.
You'll most likely never have to worry about everyone
saving too much money for very long.
The current down turn in the economy will eventually pass
and humans will probably revert back to spending money
in the same ways that they were before.
It might take a little time for them to get there,
but they'll eventually get there.
Bragging about a high savings rate isn't as sexy
as showing off an over-priced car that you just purchased,
or a house that you can barely afford.
Humans aren't wired that way.
We're wired to consume more and more useless things.
But that shouldn't stop you from striving to be just
a little bit different in this area.
If you want to eventually be financially independent
or achieve early retirement so you can get to the point
where none of this matters, then increasing your
savings rate should be at the top of your priority list.
Check out these videos to your left.
The top one will take you to all
of my financial independence videos.
The bottom one will take you to one of my
favorite investing videos.
Please make sure to Hulk smash that thumbs up button.
And check out the description of this video
for more resources and playlists to help you all evolve
your personal finance and investing needs.
I'll see you in the next one, friends, adios.