How the Recession Will Change Financial Behaviors

In its November issue, Consumer Reports listed the percentage of consumers who had changed spending practices since the recession hit and planned to continue them once it's over as follows:

• Buy only what you need -- 44%
• Put less on credit cards -- 42%
• Invest more safely -- 38%
• Put more into savings -- 35%
• Dine out less -- 22%
• Take cheaper vacations -- 22%
• Spend less on groceries -- 13%

I have a few thoughts on these findings:

1. I think the recession has made an impact on people -- showing many that they were simply too loose with their money management practices. As such, I do expect that what's happened over the past year or so will have a lasting impact on some people.

2. That said, I think the lasting impact will be on far fewer people than what the numbers above indicate. Americans forget all too easily and a few years from now the recession will be a long faded memory for most. It's then when I think old, bad habits will start to creep back into many lives.

3. I'm not sure what "buy only what you need" means. Does it mean that these people will only purchase the necessities of life and no "extras"? I can't imagine that happening.

4. I sincerely hope that a good portion of people start to borrow less and save more. Those actions would be a positive outcome of this economic hardship.

5. Looks like some big implications for the restaurant industry if these findings are anywhere near on target. Even if only 5% to 10% dine out less, that's a huge impact on these businesses.

6. I wonder if the "spend less on groceries" is simply people buying more store brand versus national brand items.

What's your take on this issue? Do you think people will actually change their behavior once the economy turns around?

Comments

[Crystal]

I think a few people will change but the majority will not.

I've been approached by friends for financial/budgeting advice at least 3 times in the last couple of years. One couple seemed to ignore it, another seemed excited about changing but didn't, and the last lady actually cut back (but I think she was going to do that anyway...she just needed someone to listen while she talked herself into it).

So, no, I do not think many people will change their lifestyles permanently.

[Bill]

It will change for a while (maybe all of a year) then people will slip back. One can hope that the slippage will not go the whole way back. Pendulum fashion. Hopefully.

[Old Limey]

I don't need to change. The only way I could change would be to become a big spender and go into debt.
I'm going to just keep living the only way I have ever known, that is "Well within my means".

I do notice changes that are largely because of the high unemployment.
We went to a restaurant on Saturday. Normally the waiting area is full of people and there's nowhere to sit. This time we walked right up to the hostess, she grabbed a couple of menus and started leading us to a table before I could ask if we could sit in a nice quiet booth in a special part of the restaurant. Usually that area requires an additional wait - this time it was completely empty. Other restaurants are likewise really suffering, a couple we went to recently have more employess than customers - how long can that last?

Yesterday we voted to pass a special parcel tax that would give our school district an extra $130/year from our property taxes, since they have had to make big cuts. That parcel tax went down to defeat. People are obviously really hurting where money is concerned.

[Jim]

Some people will change. Others will change for a while then revert back to bad behavior. I'm guessing more like 1-10% of people will really adopt different money habits. Thats just random speculation on my part though.

[Apex]

@Crystal,

Interesting that you tell that story. As per my comments on a couple other posts that has been my exact experience and observed behavior. Either someone has already realized that they absolutely must change and has been impacted in such a way as to have decided to do so and are just looking for the specifics of best practices or else they aren't going to change.

Even if they are the ones asking you for advice, you would think that would mean they are ready to change but far too often they are just experiencing a little pain and looking for someone to give them the secret painless way out of their pain. When they find out the way out of their pain is to make some painful (to them) choices in certain areas of their life they decide that the hangover pain they get from the drunken financial way they live their lives is not as bad as the withdrawal pain of giving up the financial booze. So they continue to live financially drunk day after day and just deal with the pain that causes.

[Apex]

@Old Limey,

I am curious. You are worth over 5 million if I recall. So has this resulted in no real noticeable change in your life style from when you were worth lets say 500,000.

For example, you mentioned you still drive a 1991 Mercedes you bought used and you are sometimes tempted to buy a new one but then realize you don't need it. Given that a new Mercedes would cost less than 100K (or a good used one less than 50K) and you could drive it for 5-10 years, would it be so bad if you "splurged" a little bit once in a while?

I am just curious if it's because a lifetime of great habits are hard to break even when the rigorousness with which you apply them is no longer as critical as it once was, or if a new one would provide you with almost no added enjoyment and you know it, or why you wouldn't choose to become a "big spender" just every once in a while?

Thanks.

[billyjobob]

I'm pretty much like old limey..ie. no room to chage much. I already only buy what I need. I never use credit. My vacations are not to costly. Mostly trailer camp around the USA. Only change I've noticed in myself is the " Invest more safely one. I recently put some money into TIPS. Before I didn't think to much of them... now I sorta wish I had stuck a little in them a few years back. Other than that...its hard for the frugal to be more frugal. :)

[lurker carl]

Very few people will make permanent changes. The 1950s and ensueing decades would have been far different if most people did not change their habits from what was necessary to make it through the Great Depression and rationing of goods during World War 2. Compare a 1947 Dodge to a 1957 Dodge - you'll see my reasoning.

[Old Limey]

Apex:
The only big splurge that my wife and I have that is fairly new is that we now fly Business Class on long international flights even though it adds about $3,800 each on a 13-14 hour flight from San Francisco to Europe. I also no longer change my own oil, plugs, and brake pads but I still do my own gardening, wash our own cars, and fix most things in the house myself.

It's wonderful to have an arm chair that can recline horizontally, be free from the crying babies, and be pampered with excellent food and drinks during the journey. There's also the club lounges that make the layover between flights much more tolerable.

We are definitely oddballs, as you correctly understated, we are wealthy, but we like to make homemade soup, grow our own vegetables, and even bring the unused bread home from restaurants - we never waste food. That's what happens when you are from the working class in England and lived through some nasty times during WWII.

[John Doe]

Perversely, I'm starting to believe that growing up during the recession of the early 90s was a GOOD thing. Wasn't fun, but I learned early. Having parents who went through all the economic turmoil since the late 70s and were raised frugal doesn't hurt either.

Case in point: If were were to adjust our thermostat during the winter during the winter to the new recommended temp (~72 Farenheit instead of 78), we would be turning the dial UP, not down.

And Blockbuster. I never understood why people would pay $7-10 to rent a movie when they could get it for $1-2 at the library or the grocery store.

[MC]

I think most people won't change their habits. Consumerism and keeping up with the Joneses is too ingrained in our society. Also, the same spendy lifestyles are still depicted everywhere on TV, which is where most people get their info and assumptions about what they should spend/buy.

Many people where I live have lost their jobs (a large number of the men work only in construction, and nothing's getting constructed these days) and there are lots of foreclosures. Also, my kids mentioned last night that several children they know at school are "moving" and wouldn't be at the school anymore. When I said, "that's too bad because they're your friends, are they still going to be in our city, or are they moving to another city?" My kids replied that these kids all said they were "evicted"--and what does that mean, Mom?

But I still see every fool on the street, at the gas station, or at Walmart has a cool new smartphone.

[ctreit]

Judging from the economic numbers, I am not so sure that actual consumer behavior reflects these changed attitudes. I a less than convinced that we will see a lasting change unless low economic activity stays with us a bit longer.

[mysticaltyger]

I pretty much agree with everything you said. Esp. the part about how Americans will quickly go back to their overspending. We have extremely short memories.

[Rich A.]

I wrote a similar post on my blog, based on an article in last Sunday's Parade magazine article titled "How Has the Economic Crisis Changed You?"

I think the lessons people learn from this crisis (and how long they remember the lessons) are in direct proportion to how they are impacted by it.

Those who have been out of work for over a year, with no prospect of finding a job anytime soon, who have had to make drastic changes in their lives in order to survive, will live with those changes longer, I think.

[Kirk Kinder]

We need some historical perspective to understand how the economy affects long term patterns. It all depends on what the economy does going forward. Everyone knows those that went through the Depression changed their money habits, and it continued through their lives. What most people forget is this didn't happen overnight. Too many Americans today think the Depression started at the crash of 29 and instantly resulted in soup lines that changed American lives. Not so. Remember, the roaring 20s had created a generation of Americans who lived it up as well. After the crash of 29, the stock market rallied 48%, much like today, and then it dropped again. Then it rallied 30% and failed. The reason Americans changed their habit was they had a few of these optimistic bursts interrupted with a relapse.

I am not implying that we are heading to a depression like the 30s, but if we see some up and downs for a few years, we could see a real change. And, with the structural problems we have in the economy, I think the odds are higher we see a volatile few years than a secular bull market from here.

The other thing is the market may force us to change. Credit is tightening, which reduces the deficit spending by consumers. Also, interest rates will eventually climb which creates a drag on the ability to spend.

So I agree that Americans will fight and scream about reduced spending, but the market has a funny way of getting what it wants. A country that doesn't save and overconsumes is usually given a large dose of castor oil from Mr. Market. And, it ain't pretty.