Deprivation & Consumers: Is There a Case for Renewed Spending?
Consumers were forced into a crash spending diet brought on by last year's financial crisis and vanishing supplies of consumer credit. But like many people who have let their New Year's resolutions fall by the wayside, will consumers return to old spending habits if credit becomes more available?
Personal finance expert Stacy Johnson says there's a good chance it could, even though there also is a case to be made that Americans have permanently altered their spending habits, forever reducing their reliance on credit cards and diminishing consumer irresponsibility.
"I believe that people are justifiably afraid of living in debt," Johnson said. "They didn't do anything wrong and yet they get laid off, they didn't make a mistake and yet their house has gone down in value...I think that's going to change consumer attitudes going forward."
Johnson, author of "Life or Debt 2010: A New Path to Financial Freedom,"has counseled consumers about how to eliminate their debts following the three "M's": Motivation, Method and Money. He likens the process to dieting, as people see both practices as a form of deprivation. Similar to cutting calories, reducing spending won't happen until someone has the proper motivation and methods to do so, he said.
According to the Federal Reserve, consumers borrowed less for the 10th consecutive month in November, instead focusing on saving money and reducing their debt. But they're still drowning in unpaid bills, and it will likely take years for the economy — and similarly the consumer — to recover, Johnson said.
This is because, like dieting, the process of eliminating debts occurs slowly and is best accomplished by eliminating spending that doesn't make a consumer feel too deprived.
Johnson recommends consumers make substitutions they can live with, such as drinking water that has been filtered rather than buying more expensive bottled water, or skipping an appetizer at a restaurant rather than staying home.
Despite the slow process of debt reduction, Johnson does expect that consumer delinquencies — along with the unemployment rate — has hit a point where it will level off, and that this will be reflected in Friday's credit card default reports.
"I do think we'll see delinquencies continue to fall," he said.
Though reduced borrowing has raised worries that consumers will continue to lessen their spending, thus further dampening a recovery, Johnson said only about one-third of the reduction in borrowing can be attributed to smarter spending.
The majority of this decrease is instead a result of banks increasing their reserves and writing off a large amount of their debt, and making it harder for consumers to obtain credit lines, he said. Once these conditions improve, though, borrowing will likely tick higher again.
"While I'd like to think that the whole American public is getting more responsible — and I think they may be, actually — I don't think that's certainly behind the huge drop we're seeing in consumer debt," he said.
Still, Johnson said he expects that once the economy does rebound, a good number of consumers will have trained themselves to use smart spending practices, similar to those who emerged from the Great Depression to become the single wealthiest generation, he said.
More from Consumer Nation:
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- What's on Retailers Minds? Jobs, Jobs and More Jobs
- Retail Signs of the Times 2010
- The Face of the New Luxury Consumer: Saks CEO
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