How the crisis is changing you
Frugality and safety are in; bling and plastic are out. The economic meltdown has sparked a major shift in our financial values. And one that's likely to last.
301 Moved Permanently
(Money Magazine) -- Lynne Goldberg's staffing business in Northfield, Ill., has seen revenue drop by half during the recession. Her husband, an attorney, is still working. But money is tight. Goldberg, 60, aims to trim $20,000 from their budget by paying off credit cards, refinancing the mortgage, shopping less, and having the dog groomed half as often.
"It's been like going through withdrawal," she admits. Yet watching her pennies has given her a newfound sense of control and led to some frank talk about priorities, which is bringing her family closer. "Life is getting better," Goldberg says, "because I've gotten smarter."
Millions of Americans are rediscovering the merits of thrift during this deep recession. No surprise: We're cutting up credit cards, dining in more often, and forgoing trips - routine responses to any downturn.
But this time something bigger is at work too, an intangible that is leading Goldberg and others like her, despite their financial struggles, to feel good about what's going on.
A new set of American values is emerging from the ashes of 600,000 layoffs a month, a lost decade in stocks, and the worst housing crash ever. These values may ring familiar to anyone who lived through the Great Depression. But for most of us it amounts to a large-scale makeover of the way we think about money and life.
We're not just cutting our bills, we're rejecting materialism. We're placing safety and intrinsic rewards like relationships and personal growth ahead of profit. We're embracing family and community and asking how we can help others, not just ourselves.
"We've hit a hard pendulum swing," says Douglas Brinkley, a professor of history at Rice University in Houston. And he, along with many others, believes the changes in the nation's core values could last for decades.
What does this pendulum swing look like? First, we have a sweeping new attitude about how to shepherd and deploy our assets.
In an exclusive nationwide survey conducted for this magazine earlier this year by Marketing & Research Resources, nine of 10 respondents said they have changed the way they manage their money as a result of the economic crisis; seven of 10 said their priorities are shifting as well; and a whopping 94% said the recession will have a lasting impact on the way they handle their finances.
The über-rich, we know, are doing fine. But everyone else - including, and perhaps especially, the mass affluent - has been touched in a visceral way. In the poll, only 36% of those who earned at least $75,000 said they were optimistic about the economy - vs. 44% of those who earn less.
The new values transcend money. Nearly 10% said they were giving more time to charities. More than half said they now feel plain guilty buying things they don't need. Seven in 10 said they consider spending time with family more important than ever.
Collectively, the poll data suggest that Americans are recalibrating the worth of everything, from their job and investments to their family relationships and what really makes them happy.
Perhaps most interesting: The shift appears to be driven, at least in part, by a sense that the economic crisis is a long overdue catharsis; it's the jolt we needed to reverse a multitude of bad financial habits and destructive attitudes developed over many years.
Live within your means? That makes sense. Say no to your child's latest ringtone download, and explain why? That's actually good for him. Treat your home equity like a long-term investment, not a cash account? Hey, you might even be able to retire one day.
Not all of the lessons we're suddenly taking to heart will stay with us. Wharton marketing professor David Reibstein likens the new thrift to soul-searching after the terrorist attacks of 2001, when it seemed air travel would never recover. Of course, it did - and fairly quickly. Yet historians like Brinkley believe enough people have felt enough of a sting in this downturn that our core values around money could look different well beyond the recovery.
Debt is out. In recent years, everybody seemed to have everything he wanted (or, maybe, everybody except you).
It turns out, though, that the neighbors' fancy vacation was paid for with a home-equity loan. Your friend's Manolo Blahniks were on her credit card - and probably still are. Your colleague's McMansion came via a no-doc, negative-amortization mortgage - and is now further underwater than Davy Jones's locker. Debt, debt, more debt - and, assuming those Blahniks are worn out by now, nothing to show for it but a few snapshots and loads of stress.
We're starting to take the goal of getting out of debt, and staying out of debt, seriously. Nearly 70% of our survey respondents reported that if they can't pay for a purchase with cash or a debit card, they don't buy. About three-quarters said increasing the amount they save is more important now.
And after years of paying lip service to this notion, Americans actually are socking more money away. The national savings rate, which was negative just a few years ago, shot to a 14-year high of 5% in January.
Michael and Paula Parish offer a glimpse of this trend. The couple from San Jose, both 41, have begun packing their lunches each day. They have stopped all impulse shopping online and sworn off credit cards. In the past year they managed to cut their revolving debt in half - to $15,000.
No one had a gun to their heads. Paula still has her part-time job as a client-services manager in the financial industry, and while Michael lost his high-tech job a year ago, he makes just as much now as an IT consultant. Still, "we feel a lot poorer," says Paula. "We are determined to do away with debt entirely - and for good."
Bling is bad. Even if you can afford nice things, it's no longer cool to flaunt them. Consumers have gone underground. Retail sales fell 8% in the fourth quarter of 2008.
"Ethically, it doesn't feel right to be looking at $1,000 boots and purses," says Gemma Allen, a Chicago lawyer. She and her friends used to gather for regular shopping trips to Barneys and Saks; now they meet for coffee. In a recent MetLife survey, nearly half said they already had all the possessions they need, up from 34% in 2006.
The new status symbol these days, trend watchers note, is owning (not leasing) a car that is more than three years old, which helps explain why the sale of certified pre-owned vehicles rose 1% last year while overall auto sales plunged 18%.
"All of my clients have reduced their spending - not just out of necessity but because it provides a sense of control in their life," says Stacy Francis, president of Francis Financial in New York City. "We can't control the stock market or whether we're laid off. But we can decide when to close our wallets."
Trust no one. With the decline of traditional pensions, employers handed us responsibility for our own retirement, but no investment strategy has worked - not maximizing 401(k) matches, diversification, dollar-cost averaging, nor even patience. On top of that, we've been flat-out misled by accountants, regulators, rating agencies, stock analysts, mutual funds, hedge funds, mortgage brokers, banks, and CEOs. The rash of gatekeeper scandals during the past decade has been on a breathtaking scale - and the effects are showing.
Half of the respondents in the Money poll said they now don't trust financial advisers and analysts; three-quarters believe their distrust of Wall Street will last even after the current crisis ends. It's finally sinking in: No one is looking out for you but you. Self-security is the new entitlement.
"I know one thing," says Steve Mochel, 44, a former marketing executive in New York City who was laid off without warning within days of his wife's last day at work. "If I don't create a way to be in control of my earnings for the rest of my life, I'm a fool."
Being let go after 19 years with the same agency was a wake-up call. Mochel had to let the nanny go, deep-freeze the credit cards, and cancel plans to buy a new car.
But with a good severance package and a new entrepreneurial venture (a driving school), he isn't panicked. In fact, he finds that taking life down a notch has been a blessing. Eating meals at home every night means the family stays closer, he says. "Do I feel victimized?" he says. "No. I feel like I've found my way."
Your job is your best asset. A few years ago you may have been obsessed with the next promotion, the size of your bonus, and a bunch of niggling complaints that made you want to shop for another employer. Those days will probably come again, but the market is so awful now that just having a job is reason enough for gratitude.
"Whatever used to bother people about their jobs - be it their salary, their boss, or their workload - now pales in comparison to the possibility of being laid off," says Nicole Williams, a career-development adviser in New York City. "People are now focusing on the positive aspects of their work."
According to a Randstad survey, even heavy-hitter benefits like pay, flexible hours, paid time off, and advancement have moved down the list of items deemed critical to job satisfaction. Moving up: security.
We know what really matters. As individuals stung by the downturn reflect on what makes them happy, the answer increasingly centers on spending time with family and helping out in the community.
In a recent Northwestern Mutual survey, participants were asked to select the attributes that best fit their definition of success. Topping the list was "spending quality time with family" (88%), followed by "having a good relationship with your spouse or partner" (86%).
The new set of priorities has led to a historic rise in volunteerism. Applications through the AmeriCorps online system for volunteer service more than tripled in February. Big Brothers Big Sisters of America says volunteer inquiries were up 25% in January. At the Volunteer Center of San Francisco, walk-ins were up 35% in January and another 20% in February.
Some argue that when the economy recovers, our new embrace of thrift, nesting, and altruism will end along with our fears of Armageddon. Certainly, Americans will borrow and spend again. But it won't be the same as in the pre-crisis era.
Psychologists note that trauma often leads to a shift in behavior - the worse the trauma, the more lasting the change. For example, a near-death experience typically leads people to permanently shift their focus from material success to intrinsic rewards like good relationships and personal growth. You don't see that after, say, a root canal.
In economic terms, says Tim Kasser, professor of psychology at Knox College, a job or market loss that is seen as isolated and temporary will probably not lead you to rethink your spendthrift ways. Indeed, you're just as likely to go out and run up your credit cards in an effort to feel soothed and in control.
But to the extent this recession has been a financial near-death experience for many, it could lead to a lasting shift. Says Kasser: "This is a very clear opportunity for individuals to ponder if the path they've been on for the past few decades is the optimal one."
Kim and Allan Stephenson, both 41, are among the many folks doing just that. "Acquiring things matters less," says Allan, a personal trainer in Upper Marlboro, Md. "Before, I had a laundry list of things I wanted. Now we're just thankful we're employed and appreciative of how we live."
Kim, a pharmaceutical sales rep, says they're getting back to basics. "I wasn't the best saver in the past," she admits. "But the importance of it has become obvious."
In addition to beefing up their savings, the couple feel a sharp tug to help others. "If people at church are having financial difficulties, we look at our budget and give them a couple of hundred dollars if we can," Allan says. "That's in the forefront of our minds now."
Barbara Dafoe Whitehead, director of the John Templeton Center for Thrift and Generosity at the Institute for American Values, cites a couple of reasons these new attitudes will last.
First, this downturn is having a profound impact on young people. Millions of teens are watching their parents struggle to find work and hold on to the house. Millions more in their twenties have nothing in the bank and are saddled with credit card and student debt that, because of less opportunity at work, may financially cripple them for years.
This is a replay of what happened to young people during the Great Depression - and many of them never lost their fear of being wiped out. (For more about the effects on young people, see "What About the Kids?" box at right)
Then too, our financial institutions - having had their own near-death experience - are undergoing wholesale restructuring. They will spend years trying to rebuild lost trust and keep a lid on risk. In this environment, consumers who borrow will have little choice but to also scale back their own risks. Says Whitehead: "Institutional change will help discipline individuals."
Are we turning into our grandparents - those geezer tightwads who could squeeze a penny so tight that Lincoln choked? Maybe. But is that a bad thing? It's not like older folks never borrowed or spent a dime. They just tended to do it with more discipline.
"My Depression-era clients are remarkably fiscally responsible, with true respect for money and credit," says Edward Gjertsen, a financial planner with Mack Investment Securities in Glenview, Ill. If some version of that trickles down, we'll all be better off.
Certainly, the respondents in Money's poll see a positive long-term effect. Nine out of 10 believe they'll continue to be more frugal and cost-conscious than they were prior to the crisis; nearly three-quarters say they'll be more focused on relationships than on career advancement and material gain. Many observers agree.
"We think what is happening now will be transformative," says Robbie Blinkoff, management director at Context-Based Research Group, which studies consumer behavior. "Consumers are surrounded by a lot of stuff that has no meaning, and they see that it hasn't made them happy," he says.
Blinkoff believes we will also interact differently with financial providers as a result. "We're beginning to realize that our financial institutions enabled us to live beyond our means," he says. As consumers come to grips with that, they will start paying much closer attention to the details in their mortgage and other financial documents.
They will also differentiate good borrowing (for, say, education) from bad borrowing (for a new Lexus or a Kate Spade handbag). They may still buy designer clothes and luxury cars, Blinkoff says, but only if they can do it without resorting to plastic or a second mortgage on the house.
No doubt some folks will relapse into their old bad habits once the economy gets rolling again. But you can keep your baser financial instincts in check by reminding yourself of how painful it was when you were maxed out on your credit cards or lost your job with no cash cushion.
MetLife found that half of Americans felt they were one month or less away from insolvency if they lost their job. That's a discomfort you won't forget soon. "Consumerism is not how we should express ourselves," Blinkoff says. "Find another outlet."
So volunteer time to a cause you're passionate about. Start a sideline business. Invest in your own growth by taking a class or picking up a new hobby. Be aware of all the fun and fulfilling things you can do that don't cost a dime. At the Boston public library, new cards are up by a third - a trend that is echoed in libraries nationwide.
Surround yourself with people who feel the way you do about what matters in life, says the Templeton Center's Whitehead. If you fall in with a group of competitive shoppers, you risk adopting their bad habits. The beauty of being thrifty, says Whitehead, is that it makes so much else possible - like personal financial security, giving gifts to others, and spending quality time with those you love.
Above all, commit yourself to living within your means. Focus on keeping up your job skills and contacts - career basics that were easy to blow off during boom times. Keep a cash cushion of at least one year's expenses; your home equity and 401(k) no longer substitute.
Be frugal - coupon clipping is up 10%. Be smart - we collectively leave billions of dollars on the table each year by not taking the time to fill out forms for student aid, health- and child-care spending accounts, and properly managing our 401(k) to get the full company match. Just say no to home-equity financed luxuries. Separate your wants from your needs.
"We finally understand we can't have it all without paying a price," says Karin Maloney Stifler, a certified financial planner in Hudson, Ohio. "And the price now seems too high. There's nothing wrong with possessing money, but there's something very wrong with money possessing us."