The Paradox of Thrift

One of the more amusing paradoxes that surfaces up in textbook economics is known as the 'paradox of thrift,' which occurs when one person engages in a financial beneficial action, but has negative consequences when the whole country does it. For instance, let's say that, going into the 2008 recession, I had $20,000 in debt. When the economy tanked, I got spooked, and vowed to never get into that type of poor fiscal health again. Like a responsible adult, I kept my vow in 2010 and 2011 as the economy slowly but surely began to improve. Instead of going out and increasing my purchases, I use my excess disposable income to pay down my debt and improve my finances.

This is perfectly logical, smart, and leads to long-term financial security. But what if an entire country engages in this practice? The economy needs consumers to spend money in order to grow, and if consumers are paying down their debt instead of enjoying fancy meals and luxury goods, then it hampers economic growth, employment, wage increases, etc. It seems incredibly counter-intuitive that being responsible with your money doesn't add to the country's growth, but it doesn't matter. Getting in a position where you are no longer suffering from bone-breaking debt is the most important goal, and if that means it takes you longer to contribute to the GDP, then so be it.

Wall Street Daily recently put out a good post on this very subject: http://www.wallstreetdaily.com/2011/06/24/investment-news-in-perspective/ .

The Financial Costs of Bad Habits

Jeff Rose over at Good Financial Cents recently ran an interesting article about the types of bad habits that suck the disposable income out of people. I always enjoy reading articles like these because it is helpful to remember to avoid the 'death by a thousand cuts' syndrome that can severely cripple your financial health if you're not careful. The typical example that those in the financial field like to use is the hypothetical $5 cup of Starbuck's coffee. There is a reason why this is the universal example used--if you get a $5 coffee every morning before working, you're looking at about $100 monthly expense, or a $1000+ annual expense that could easily be eliminated. If possible, you want to plug up all of these leaks in your financial boat. It is incredibly easy to fall into the trap of allowing $2 to $3 frictional expenses to slip out of your wallet with your really thinking about it, and that's what makes it so dangerous and tempting. Any regular expense that you throw your disposable income towards could threaten your financial future, and ultimately, you're going to have to decide whether you can afford to be blowing that kind of money in this economy, because often, the small frictional expenses can add up to be quite more than you realize. If you want to read Mr. Rose's great article on the subject, click here: http://www.goodfinancialcents.com/bad-financial-habits-how-to-breaking-them/