Fairly often, I give interviews to media sources – newspaper reporters, radio hosts, and so on – where I share my story of financial recovery and how I managed to achieve it. Most of the questions are pretty straightforward, as they’re simply related to the story of my own life and some basic financial strategies.
However, there’s one question I get asked pretty regularly that’s quite tricky. It usually goes something like this…
It’s great that you’ve managed to find financial success through frugality, but what would happen to America if everyone became frugal and spent a lot less than they earned?
My stock answer to that question is short and sweet. “America would go through a rough patch for a little while, but eventually we’d be better off than ever.”
Usually, that answer is good enough, but sometimes I’ll get a reporter who finds that answer interesting and digs in a little more, at which point I’m usually thinking on my feet and using my understanding of economics within my own head to give reasonable follow-up answers.
Those follow-up questions stick with me.
What actually would happen if everyone in America suddenly became frugal and spent less than they earned? Would it mean another economic depression? How would we ever rebound from that? What happens when lots of people retire early? Does America just become a nation of shoegazing slackers?
Today, I’m going to try to piece together my full answer to those questions and many others.
Financial Independence and Frugality for All?
The most important thing to point out in all of this is that a world in which everyone is frugal and spends less than they earn will never, ever happen. There are too many people in the world who hold a very short-term personal philosophy that they will never abandon, no matter what. There will always be people who choose to make the short-term choice, no matter how much obviously better the long-term choice is.
By default, humans are short-term thinkers. We were wired for survival in the savannah, in a hunter-gatherer state. That mindset is a short-term mindset that focuses on where to get food and resources in the next few days without any significant regard for the long term.
We’re all wired a bit differently. Some people are able to suppress those short-term desires and plan for the long term. Others simply aren’t wired that way. We’ve all experienced how different people think and act in different ways, and this is no exception.
What that means is that even if there was a mass movement toward saving more for retirement and retiring early, a lot of people would simply reject the philosophy and wouldn’t get on board at all. That’s just human nature.
Perhaps the better question to ask is this: what if frugality, spending significantly less than you earn, and financial independence became a large movement with a lot of adherents? How would that affect the economy and everyone’s day to day life?
A Simple Look at the Path
Before we go any further, let’s step back and take a really simplified look at the idea of frugality and saving for the future.
Let’s say that there’s a guy who makes belts. Each day, he makes 10 belts that he can then immediately sell.
A person who isn’t frugal and isn’t saving from the future might take the money from all 10 belts and spend it immediately on stuff he wants and needs in his daily life. He might buy a great dinner that evening, fill up his cupboard with other foods, go to the movies, fill up his car with gas, and so on.
What about a person who’s somewhat frugal and willing to save for the future? That person might spend the money from nine of the belts and put aside the money from one belt for the future. That person might be able to do that because they chose to eat a simple supper or they watched a movie at home or they drove a more fuel-efficient car.
A person who is able to do something like live off of the proceeds of five belts and save the proceeds of the other five would go even further. That person might not even own a car and gets around on foot. They might live in a small home and have a big garden that provides for their needs.
In the first case, that person won’t have anything for the future. When they need upgrades for their business, they’ll have to take on debt for it, and they’ll work until they can’t work any more.
In the second case, the person will probably be able to retire in their old age and no longer work, instead living off of the proceeds of the one belt’s worth of income and perhaps paying for their own equipment upgrades on their own money and without debt throughout their life.
The third case is the interesting one. That person will soon be in a situation where they don’t have to make belts at all if they don’t want to. That person will also have a ton of options. They might be able to afford to hire some people to make more belts for him to sell, which would be a route to take if he likes the sales aspect of things. They also might be able to automate much of the belt making thanks to expensive equipment that they can now afford. Or, that person might walk away from belt making entirely and follow another path that they feel is their true calling – maybe it’s writing a book or designing a better tool of some kind or perhaps working for a charity.
The point is, that third person has a lot of options after a few years of spending less than he earns. Sure, during those first lean years, life is rough, but their life opens up with options.
This is almost exactly what happens in the real world.
The person who spends all of their money has lots of short-term options – which are usually bent towards buying stuff – but very few long-term options.
The person who spends almost all of their money and saves only a little for the future has a slightly smaller set of short-term options, but they have added a little to their long-term options.
The person who spends as little as possible and saves as much as possible has a much smaller set of short-term options – they aren’t going to be spending much at all beyond buying essentials – but a much, much larger set of long-term options.
Today, most people are in that first group. What happens when a significant number of people move to the second and especially the third group? That’s the real question.
The First Group – the ‘Spend Now and Don’t Save’ Group – Shrinks
Right now, our economy is set up to serve the needs of the people in this group. It is focused on consumer goods and services for people who spend all or almost all of what they earn.
If that group shrinks, the immediate effect will be a pretty strong recession. That’s because the people that move out of this group are moving into the other two groups, both of which spend less money in the short term because they’re saving for the future.
Companies that rely on people spending money freely on goods and services are going to hurt – there’s no way around it. People will buy significantly fewer luxury goods and services and that’s simply going to hurt the economy, especially those companies that aren’t focused on essential goods.
However, that doesn’t mean that the second and third groups will stop spending. They’ll spend like they always have – on essential products and well-made products. Companies that have a reputation for producing true quality products won’t be hurt nearly as bad as companies that produce lower-quality goods at a cheaper price. Companies that pump out cheap junk will be in a real pickle, but companies that make quality products won’t be affected too much.
Another sector that will be fine is the banking sector. They’re going to receive an influx of cash thanks to all of these new savers, which will give them a lot of capital. What will they do with it? They’ll be able to make loans available – and we’ll get back to that in a minute.
What will be the impact on day-to-day life? There will be fewer jobs, for one, particularly at the entry level. It will feel like a pretty deep recession, much like 2008 and 2009 did, or perhaps even worse, but enough companies will be just fine through this transition that it won’t be truly disastrous.
The Second Group – the ‘Save a Little and Still Spend a Lot’ Group – Grows
This group is going to largely be putting their money in long-term investments. They’ll be hit somewhat hard by the shakeout in the business world as many of the service businesses struggle and the overall stock market tanks (because companies would have to start cutting dividends because of their tight business).
After a time, however, the businesses that provide more essential services and the businesses that produce quality items would do fine. Investments would stabilize and start growing again.
The people in this group would eventually find themselves in a secure retirement, much as they would if nothing changed. The only difference is that 20 or 30 years down the road, there would be a lot of people in their sixties and seventies who would be launching a very healthy retirement, one that would probably involve a second career not too different than the third group, which I’m going to discuss below.
The Third Group – the ‘Save a Lot and Spend Very Little’ Group – Grows
This is the interesting group, in my opinion.
These people will continue to spend money, but it will be at a relatively low rate and it will be channeled toward reliable goods and low-cost consumable staples. They buy a lot of generics at the grocery store. When they buy equipment, it’s usually good equipment that will last and that they can repair themselves easily.
These people are going to reach financial independence fairly quickly. Within several years, they will no longer need much of an income to survive in the world. They will no longer have to work.
It is during that period, when the third group is spending very little and saving a lot, where we’ll see an economic slowdown. That’s because a significant portion – but not all – of the economy isn’t spending money on consumer goods at a high rate, but that doesn’t mean the money has vanished. It means that the money is being invested elsewhere – in banks, in real estate, in other things.
Then what? What happens when these people turn the corner and are able to retire? Do we have a lot of people doing nothing?
Self-Motivation Kicks In
Here’s the thing: If a person is self-motivated enough to commit to a path of financial independence, they’re not going to suddenly become completely idle when they achieve it.
They’ll channel that self-motivation into something – but what?
Most of them will move on to whatever they think their true life calling is. What is the problem in the world that they would most like to play a role in solving? Where and how can they actually make a difference with that problem?
Those are the kinds of questions that people start asking themselves if they’re self-motivated and self-directed and they’ve achieved financial independence – and you have to be self-motivated and self-directed to reach financial independence very quickly.
What will that look like?
Some will start businesses to make whatever product they’re dreaming of. Others will start non-profits – or join them. Still others may find a very solitary path.
The thing is, those people will start making stuff on their own terms without the motivation of a need to earn a living. Sure, they’ll want to make a little, but they’ll already have all of the financial wealth they’ll need for the rest of their lives. Their motivation will be something beyond profit.
I would expect, after a few years, to see a lot of brainpower and effort being thrown at the big problems on earth. How do we feed everyone? How do we start making steps toward exploring outer space? How do we cure cancer? How do we ensure clean water for everyone?
I would also expect a pretty big explosion in artistic creativity as well, along with some huge jumps in charitable work.
Why? Those are the kinds of things that self-motivated people do when you remove the requirement of earning a living from their efforts. They get involved with the things they care deeply about.
If you look around at the wealthy people in this world who have stepped back from the further accumulation of wealth, they don’t just sit around staring at the flowers. They find something useful to do with their time.
My primary case in point is Bill Gates and the tremendous work that’s being done through the Bill and Melinda Gates Foundation. He spends the vast majority of his time figuring out ways to solve the problems he perceives in the world, applies his sharp mind to solutions to those problems, and funds them appropriately when he can.
That’s what would happen if there were a “revolution” in favor of financial independence. You would have millions of people doing what Bill Gates does, though perhaps not with the same bankroll, and doing it in a variety of ways.
Here’s what I think would happen over the coming decades if there were suddenly a change of direction in America and a large number of people started saving adequately for retirement and many went even further and worked for financial independence at an early age.
First, we’d have an economic downturn as the economy sorted itself out. Many businesses would run into trouble – particularly those that served the most unnecessary flavors of consumerism. Other businesses – those that made good products – would continue to do fine.
Second, the surviving companies would be flush with investors. That’s because there would be a lot of people who were spending less than they earned and that money would need to be invested somewhere. After a downturn, I’d expect a boom, at least in terms of the stock market.
Third, banks would be flush with cash and ready to invest in interesting opportunities. It would be a great time for people with ideas who are looking for startup money for their businesses, as banks would have plenty of money to invest. As this went on, lots of people would start becoming “angel investors” for great ideas as well as donators to nonprofits.
Finally, after several years, we would start seeing notable headway on many of the world’s problems. The brainpower and energy of people who were otherwise focused on financial independence would begin to turn their attention away from earning more money and towards solving the problems they see in the world. I’m actually doing this myself, to a certain extent, and I expect it to accelerate as we move toward that point. I see it in the stories of others who have reached true independence as well.
It is far more interesting and exciting to be working on solving a problem you particularly care about, after all, and if you’re self-motivated and have skills, you’re going to be pushing toward solutions. That basically describes the folks that would actually be on board with financial independence.
Overall, America would follow the same life story as the people who actually choose financial independence. America would have some very lean options in the short term, but as time moved along and people started actually achieving that independence, the doors would open wide, far wider than they ever have before.
I guess, in the end, it really does come down to that summary I offered up in the interviews. “America would go through a rough patch for a little while, but eventually we’d be better off than ever.”
It’s a nice dream. I’m trying to play my part. I hope you will, too.