“We find when people change their savings rate, tends to be permanent behavior,” he said. “Reducing personal debt also tends to be structural change. These are very positive trends.”
While a renewed focus on paying off debt may sound like a good thing, it can also hamper economic growth in the short-term. When people spend their wages paying off debt, they are spending less in the marketplace.
“We’re seeing a lot less spending on restaurants, expensive groceries, new clothes — things that aren’t necessities,” said Michael Bapis, a financial adviser and managing director with the Bapis Group at HighTower Advisors, an investment management group based out of New York and Utah. “It’s probably bottomed out, but you’re still not seeing strong growth in any of those spaces. And it’s kind of a Catch-22. It’s obviously a balance. But this could be causing the economy not to bounce back as quickly as it could.”
An April study from the New York Federal Reserve indicated that while debt reduction has likely helped household balance sheets, it has also likely contributed to slow consumption growth since the beginning of the recession. The study concludes that "the trajectory for consumer indebtedness has important implications for consumption and economic growth going forward." In other words, not all debt is evil, and it can be an important economic driver.
But how Americans balance their debt loads and take on lower interest rate debt is what leads to financially stability over the long term, Sweeney said.
“You want healthy levels of debt and a sustainable growth rate,” he said. “If you have a mortgage payment you’re not stressed about, that’s a good use of borrowing, but when you’re putting a meal that lasts one evening on a credit card paid for over multiple months or years, it’s not a good use of borrowing. It’s not sustainable.”
Experts also agree that Americans need to not panic and rush into conservative investments like bonds just because the recession has made them more risk-averse. Such a strategy may actually increase exposure to additional risk. “We could be in the biggest bond bubble in history because of people’s fear. But we have it in our minds that bonds are safe,” Bapis said.
Sweeney suggested investors keep money diversified, even if they are near retirement age. While the temptation is to go solely into bonds, he said keeping money in the stock market over the long term in addition to bonds and cash is the best strategy to ride out periods of recession. “You want people to have a balanced boat not running from one side of the boat to the other,” he said.
A new generation of savers
Eric Recker is not alone among his peers in paying more attention to his personal finances. The lessons of the recession have particularly been striking home for the Millennial generation. According to a recent study by Moody’s Analytics, the savings rate among young people has jumped dramatically from 2006, where it was at a dismal negative 16 percent, to the present 2 to 3 percent. Even with their debt loads higher than other generations, the under-35 crowd is now saving about as much as people 35 to 44 and nearly as much as those between 45 and 54.
“One of the brighter spots coming out of the downturn was the Gen Y saver feels much more knowledgeable and has a much more positive outlook than other investors,” said Sweeney.
He added that behaviors like the ones Recker has — automatically saving 15 percent of income, paying off credit card debt and increasing retirement contributions — are hugely important for young people to create economic stability.
Young people are tending to turn to the Internet and their community to learn about budgeting and saving habits. Recker sees he has gotten financial advice from his dad, and community support for budgeting and saving among his peers, even if most of his associates don’t take it quite to the extreme spreadsheeting that he does.
“People my age are definitely conscious of it, and there’s an awareness out there of budgeting and saving,” he said. “It helps to have other people in the same mindset. We all look out for each other.”