Despite what you may think, Americans aren’t rushing out to spend all that money we’re saving on gasoline at the pump.
How can we explain this disconnect? It seems that consumers are saving some of the windfall cash from lower gasoline prices, with the personal savings rate increasing to 4.9% in December [my note: this personal savings rate they are talking about does NOT mean people are literally putting cash in savings accounts]. Another factor is that our data may be skewed by consumers with credit cards who are not as budget constrained as those who spend predominately with cash. Looking at a breakdown of spending by key sectors, we find a pick-up in sales at home improvement stores, restaurants and grocery stores, but a slowdown in lodging and furniture sales.
This reflects, on a large scale, the “bailout mentality” that I rail against so frequently. People make decisions based not on current reality but fanciful expectations about the future. They think they can spend now or live above their means because hey, I’ll get that raise any day now. Or a new, better job! Or gas prices will drop by half!
Sometimes, that bailout actually happens. For those who have good financial habits and the proper mindset, this is purely an unexpected bonus. They can save, invest, take a big vacation, or whatever.
But for people who were waiting on a bailout, that money goes straight out the door to pay down debt. And actually, since they haven’t developed good discipline, they forgo paying down debt and just buy more stuff.
With the Powerball jackpot being at $485 million for tomorrow’s drawing, it’s a good time to remind ourselves why lottery winners usually end up broke and miserable. Unless you develop the mindset and habits needed to save more than you spend, you will always be living paycheck to paycheck–no matter how big that paycheck is.