Fairly regularly, a commenter on this site will chastise me and most of my visitors for being frugal, saying that hoarding all of your money is bad for the economy because we’re not spending it and keeping the money flowing. On the surface, this makes some sense – I’m holding onto money that I’m not spending at retailers so the retailers are doing worse business – but in the larger scale, a frugal person who is careful with their money is actually a boon for the economy. Let’s look at the reasons why.
First of all, a savings account is basically a loan to the bank. Instead of giving retailers money, you’re giving the bank money. In both cases, you get something back, but in that transaction, both businesses make money. If you give your money to a retailer for a product, they get to keep the markup. If you give your money to a bank, they use it to loan money to other people. So, if you put money in a savings account, you’re largely assisting the banking industry instead of the retail industry – you’re still helping the economy, just a different piece of it.
Continuing that train of thought, investing in a stock assists that company in doing business. A stock is issued by a company to help it raise money and grow in various ways. If you buy that stock, you’re helping the company by helping that stock maintain its value (which, in turn, represents the company’s value).
Let’s keep going:
If you buy a treasury note, you help out the federal government by lending them money for a while that they can use for various reasons.
If you start a new business with your saved money, you’re definitely boosting the local economy.
If you save ahead for a big purchase, you’re making that purchase faster than if you used credit to pay for it, which means that you have money to save or invest in other places.
If you reuse a product several times before throwing it away, you’re taking money you might have blown on replacement products at retailers and instead saving it at the bank.
What about economic cycles? Such cycles are caused by large-scale corporate behavior, not by individual choices. Companies always have ups and downs, and many of those ups and downs are tied together. For example, if 10,000 people decided to save up for a car instead of buying it on credit, it wouldn’t make much of a difference in the economy at all (some sectors would be up and others would be down, but the cash would still be out there), but if oil prices go up, that causes a domino effect in a bunch of different industries.
In short, the idea that not spending money is damaging to the economy is rather foolish. All you’re really doing by saving money and investing is moving money from one part of the economy to another part, not removing it all together.
Unless, of course, you’re going to bury it all in jars in the back yard, but that’s foolish in its own way.