Not to overstate the obvious, but the last 18 months have seen significant modifications in how most Americans spend their money. Without visiting department stores, malls, and big-box stores, retail therapy was significantly curtailed. Spending on travel, entertainment, restaurants, and bars all plummeted, even with consumers splurging on grocery deliveries, buying essentials on Amazon. There’s a lot more disposable cash in bank accounts than there was previously, making it easy to fall prey to online sales promotions. But if retail sales reports and analyses are accurate, that’s all but over now.
Cash is burning holes in proverbial pockets, and spending has been going way up. (1) Whether we have a temporary Delta slowdown in the third quarter, no one knows.
People who sat on spending during the worst of the crisis admitted they’re ready to buy non-essentials again and expect to increase their spending by a median of 4.1% over the next year. That’s either a sign of confidence in the vaccine or of cabin fever, as it was a bump up of 1.6% from just four months earlier when the vaccines’ emergency approvals gave hope for an end to the crisis.
The new number reflects the highest level of anticipated spending since the bank started surveying in 2013. Most people responding to the April survey expect to spend on vacations, home repairs, home appliances, and furniture.
Feeling the urge to splurge is entirely understandable. Still, there’s a difference between treating yourself and putting yourself into a financial hole. Remember the lesson of the freshman in college at their first keg party. Going crazy just because you can feel good at the moment, but you’re going to regret it. For the freshman, the headache comes in the morning. For the consumer, it’s when your credit card bills come rolling in – or when you deplete your savings and then suddenly need them for something unexpected.
It’s not hard to reward yourself for your pandemic austerity without putting yourself into debt. All it takes is a bit of planning. You may not like the idea of budgeting. However, it is one of the best tools available to ensure your bank account has a comfortable amount of reserve when you start spending again. One of the best approaches is to divide your savings into four separate categories:
What you need to spend.
What you're saving for an emergency.
What you're saving for retirement.
What you can spend on anything your heart desires.
It’s up to you what percentage or amount you put into each category. The simple exercise of sitting down and deciding will put the brakes on you jumping to blow it all on a trip to Cabo.
Check out some of these top-rated budgeting apps that might make the process a lot easier.
Feel free to contact us before you make any tax or personal finance life decisions.
NewYorkFed.org, August 2021.