Since the decline in the financial and housing markets in 2008 and 2009, middle-class Americans have responded to the economic turmoil by making a distinct shift in their personal financial habits.
After years of rampant consumerism, they are reining in spending, cutting debt and adopting frugality as a way of life. The First Command Financial Behaviors Index® reveals that a growing number of families are making permanent, positive changes in their spending habits. One of the monthly survey’s recurring questions is “How long do you think you will continue to cut back on your spending?” A steadily growing percentage of survey respondents are saying they “have cut back for good” (14 percent in February 2009, 20 percent in May 2009, 25 percent in October 2009 and 30 percent in May 2010).
Gallup polls ¹ in the spring and summer of 2009 also suggest that Americans may be moving toward a permanent change. Nearly one-third of consumers polled (32 percent) indicated that their reduced spending habits will become their “new normal” while fully one-half said they will be spending less – even after the economy recovers.
Welcome to the New Frugality. Americans are taking control of their finances by curbing their spending and getting out of debt – positive behaviors that are good for families as well as the nation.
“Americans are getting back in the savings habit,” said Scott Spiker, CEO of First Command Financial Services, Inc. “We’re not likely to see a genuinely healthy economy unless Americans are spending and saving wisely.”
Historically, the U.S. rate of personal savings has fluctuated over time, ranging from the low point during the years 1932 and 1933 – when the rate was actually negative as the country struggled in the throes of the Great Depression – to a high of 14.6 percent in May 1975. These rates suggest that when times are hard, unemployment is high and the future uncertain, consumers tend to save more and withhold the spending of discretionary dollars from the marketplace. Conversely, when unemployment is relatively low, home values are growing and consumer confidence is high, people tend to save less – or not at all.
U.S. personal savings behaviors during the first decade of the 21st century have mirrored the historical trends. In early 2005, the Commerce Department reported that the savings rate had dipped into negative territory (- 0.4 percent) for the first time since 1933. The report revealed that people were using dollars from cash reserves to finance their lifestyles.² David Wyss, chief economist at Standard & Poors in New York, responded to the government findings by noting that “Americans seem to have the feeling that it is wimpish to save.”
So how do Americans feel about saving money today? The Financial Behaviors Index offers some fascinating insights into the minds of middle-class consumers. Researchers have identified four distinct groups of people with very different ideas about savings and frugality. They include:
- Free Spirits. These are the unrepentant spenders. They’ve had limited reaction to the current economic conditions, and they still believe it’s okay to live paycheck to paycheck. They’re not frugal now; they’re not likely to turn frugal in the future.
- True Frugals. These are the dedicated, traditional savers. No wimps in this group. These Americans have always valued frugality. They tend to have higher savings rates than others and be engaged with financial planners to help them manage their money.
- Foul Weather Frugals. These people are adopting certain frugal behaviors based on the current economic conditions. As the economy improves, they may discontinue their frugal ways and return to the spending of the past.
- Scared Straights. These consumers have changed their behavior based on current economic conditions. If they see the value of frugality, they have the potential to move into the True Frugals category.
Scared Straights are the ones to watch in the coming economic recovery. Making up 30 percent of middle-class families, they have the power to significantly alter the face of the consumer landscape. This large block of consumers may eventually decide that it is wimpish to save and return to their spendthrift ways. Or perhaps they will transform their temporary frugality into a permanent behavioral change that values spending less and saving more.
Without a crystal ball, no one can say for sure how Americans will respond to a return to prosperity. Will they build emergency savings that will be sufficient to cover the inevitable but unplanned expenses that occur from time to time? Will they embrace personal savings and eschew consumer debt as a means of financing their lifestyles? Clearly middle-class families are showing encouraging signs of a fundamental, long-term shift in their approach to personal finance. This change signals an economic recovery that may well be led by Americans who make a permanent commitment to spend and save wisely.
About the First Command Financial Behaviors Index®
Compiled by Sentient Decision Science, LLC, the First Command Financial Behaviors Index® assesses trends among the American public’s financial behaviors, attitudes and intentions through a monthly survey of approximately 1,000 U.S. consumers aged 25 to 70 with annual household incomes of at least $50,000. Results are reported quarterly. The margin of error is +/- 3.1 percent with a 95 percent level of confidence. www.firstcommand.com/research
About Sentient Decision Science, LLC
Sentient Decision Science was commissioned by First Command to compile the Financial Behaviors Index®. Sentient is a full-service market research firm with special vertical expertise within the financial services industry. Sentient specializes in advanced research design and statistical analysis of behavioral and attitudinal data.
About First Command
First Command Financial Services and its subsidiaries, including First Command Bank and First Command Financial Planning, assist American families in their efforts to build wealth, reduce debt and pursue their lifetime financial goals and dreams—focusing on consumer behavior as the first and most powerful determinant of results. Through personalized financial plans that emphasize accumulating wealth while reducing risk, First Command Financial Advisors have established lasting relationships with hundreds of thousands of client families since 1958.
First Command Financial Services, Inc. is the parent company of First Command Financial Planning, Inc. (Member SIPC, FINRA) and First Command Bank (Member FDIC). Financial planning services and investment products, including securities products are offered by First Command Financial Planning, Inc. Insurance products and services are offered by First Command Financial Services, Inc. Banking products and services are offered by First Command Bank. Securities products are not FDIC insured, have no bank guarantee and may lose value. In certain states, First Command Financial Services, Inc. is a separately registered domestic corporation and does business in California as “First Command Insurance Services.” A financial plan, by itself, cannot assure that retirement or other financial goals will be met.
1 See “In U.S., One-Third Still Set on Spending Less as New Normal” by Frank Newport
2 See Associated Press, January 30, 2006