When Fear is Good

Sometimes a healthy dose of fear can keep you out of trouble. In fact, if more people were a little nervous a couple of years ago, they may not have found themselves in the pickle they are in today. But when the party is rocking, it sure is hard to stop from indulging. Now that the clock has struck midnight and the guests have scattered, there finally appears to be a healthy dose of caution spreading across the nation.

We saw evidence of this fact when data on personal spending was released on Friday. The Commerce Department reported that personal consumption increased by a paltry 0.1% compared to the month before, despite the fact that incomes accelerated (personal income increased at a seasonally adjusted rate of 0.5% compared to the month before.) I interpret this as a rational reaction to a plethora of bad news. As the housing recession continues, the credit crisis escalates and the mood seems almost universally dour, people are thinking twice about how they spend. That means that folks are shelling out money for the stuff they need, not the stuff they want -- a most welcome development.

I experienced this first hand last week when I spoke to my client “Jane”. At our meeting last summer, Jane laid out plans to spend $150,000 on a home improvement project. Although I was not in support of the idea, I knew that they were going to do it anyway, so I came up with a couple of ways to finance it. I reminded them that assuming the additional debt meant that saving for retirement and college would move to the back burner. Jane and her husband are not irresponsible sorts, but they had convinced themselves the project “had to be done”. In other words, they turned a discretionary spending item into a necessity.

Fast forward to last Thursday when Jane sent me an e-mail saying “it just feels like this may not be a good time to make this expenditure. The news talks about recession and how people are cutting back on big ticket purchases. We don't want to overextend ourselves, especially at a time when everything seems so uncertain.” When I spoke to Jane, she was resigned, but not happy about the decision. I reminded her that they could do the project when they had saved the majority of the money necessary to do it, to which she responded, “Using our own money-wow, what a concept, but of course, it makes all the sense in the world. I guess over the past few years we have forgotten the basics!” Funny how a boom can make you do lots of crazy things, but thankfully, fear can correct those excesses quickly.