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Personal Spending Explodes – Are Americans Giving Up Their Retirement Dreams?

Is inflation becoming entrenched? The average American family seem to think so – and they’re using credit cards and 401k withdrawals to finance their spending. This is not a story that ends well for anyone…

From Peter Reagan at Birch Gold Group

It might be common sense to think Americans would be saving more money, considering the rate of inflation (currently running 7.1% year over year).

On the other hand, when we remember that inflation has been running over 6% since August 2021, maybe people are just accepting this as a new normal…

Consumer spending in the U.S. continues to climb, as you can see in the chart below:

Maybe you’re thinking, Of course people are spending more – everything is more expensive these days!

You’re absolutely right. This is not a story about consumer spending going up in lockstep with prices – unlike most finance writers, I think in terms of “real” or inflation-adjusted dollars.

At first, I wondered whether American families were implementing “the Argentine antidote” to high inflation (spend your paycheck immediately, and so on). This recent article on declining household wealth seemed to support my initial thoughts:

U.S. household wealth fell by $400 billion in the third quarter as a drop in U.S.... a Federal Reserve report showed Friday. Household net worth declined to $143.3 trillion at the end of September from $143.7 trillion at the end of June, the Fed's quarterly snapshot of the national balance sheet showed. It was the third consecutive quarter household wealth has declined.

Meanwhile, credit card balances are on the rise (I’ve added both credit card debt and personal savings to the chart below, so you can see how they’re related):

So just to recap where we are:

  • Spending is growing even faster than we’d expect based on inflation
  • While household net worth is declining
  • And this spending seems to be fueled by saving less while taking on credit card debt!

Does this strike you as a prudent plan for long-term prosperity?

Now, don’t get me wrong – not all debt is necessarily bad. Anyone might put an $1,800 emergency car repair on their credit card and expect to pay it off next month. That kind of thing happens.

What concerns me is the trend, combined with the knowledge that most people use credit cards to fund spending on conveniences and luxuries.

And this spending spree is happening at a particularly bad time…

Fed’s rate hikes are bad news for borrowers

To maintain its price-stability mandate, the Fed is fighting inflation by raising interest rates. Higher interest rates generally slow down economic activity by making borrowing more expensive.

The current median interest rate on credit card balances is 22.12%.

That’s a shockingly high price to pay for conveniences and luxuries!

Now, it’s completely possible that the study I linked above is wrong – that these days, American families are using credit cards to finance basic household expenses like gas and groceries.

That would be more responsible than running up credit card debt for, oh, tickets to hockey games or dinner at a trendy restaurant – what economists call “nonproductive investment.”

Regardless of where this money is going, though, this trend is unsustainable. As Ray Dalio reminds us, credit is just a way of spending tomorrow’s paycheck today (which means we can’t spend it tomorrow).

And there’s still another aspect we have to consider – Americans saving for retirement are also withdrawing money from their 401k plans at a record pace:

The share of retirement savers who withdrew money from a 401(k) plan to cover a financial hardship hit a record high in October, according to data from Vanguard Group.

That dynamic — when coupled with other factors like fast-rising credit card balances and a declining personal savings rate — suggests households are having a tougher time making ends meet amid persistently high inflation and need ready cash, according to financial experts… That’s the largest share since Vanguard began tracking the data in 2004.

Withdrawing funds from your 401k should be considered a last resort. Such a move can easily derail your retirement plans and put your financial future in jeopardy.

Now, with all that background, the final consideration is the coming recession. (I’ve discussed this previously at great length – suffice to say here a recession at best is coming next year.)

When that recession comes – and remember, recessions are a fact of life – you don’t want to be stuck paying off credit card bills and paying back a 401k loan while the economy is shaky. Debt is destabilizing – and more debt is even more destabilizing.

Here are some options to consider instead…

Recession-proofing your finances

Now would be a good time to consider ways to pay off credit card debt and build an emergency fund that could get you through the tough times that, we must remember, are certain to come.

Basic debt-reduction suggestions to consider, via BankRate.

Via ConsumerFinance.gov, our federal government offers common-sense suggestions for your emergency fund. (They even explain how to save money! This should be required reading in Washington!)

I've provided links rather than any commentary here because I sincerely hope my readers already know all this! If so, I’m relieved – you’ll likely be in a much more stable financial position when the going gets rough. You’re very likely a long-term thinker and a planner, so you might be interested in ways to add long-term stability to your savings.

Uncertain times call for long-term thinking

Long-term thinkers aren’t likely to be the kinds of people who, on a whim, get a new 75-inch QLED TV and finance it at the store. Spending on “conveniences and luxuries” may provide some short-term satisfaction, but it doesn’t deliver any long-term financial benefits.

If you’re a long-term thinker, you know you have to anticipate a lot of factors… What will returns on investment be over the next decade? Which industries will become suddenly obsolete? Which nations will default on their debts? What will the rate of inflation be? If that’s too many variables for you, consider diversifying your savings with physical precious metals like gold and silver.

They have historically proven themselves to be an inflation resistant investment. They don’t require scrutinizing financial statements or signing thousand-page prospectus documents. To the contrary – a great deal of their appeal is in their simplicity.

Plus, you’ll gain the additional benefits of long-term financial security and peace of mind, knowing that your buying power will be, at the very least, preserved.

Right now, that 75-inch QLED ultra-high-definition TV costs about the same as a 1/2 oz American gold eagle. Which of them is going to be worth more a year from now? Five years? Fifty?

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