My paycheck is bigger than it was last year.
No, I didn’t get a raise. Thanks to the recent tax cuts, I get to keep more of my yearly income than I used to, and you do too.
It’s a pretty strange sensation given the ever-shrinking paycheck I’ve received over the last several years, reduced regularly by increasing health insurance premiums. Don’t get me wrong, I fully expect health insurance premiums to continue to rise, but it’s still nice to keep more of my money than I did last year.
The government says it wants us to take this added income and put it back into the economy through increased consumer spending. The more you and I spend, the more the economy grows, it argues. The more the economy grows, the more everyone benefits. Well, that’s the way the story is supposed to go, according to supply-side economists.
Does it work? That depends on who you ask and it opens up a complicated argument involving lots of economic theory and subjective metrics which will leave your head spinning. But I won’t focus on that today. Instead, I'd like to focus on what you should do with that added take-home pay.
Don’t buy more stuff
First of all, know that your personal economy should take priority over our national economy. I’m not anti-American. I’m pro-you.
Anytime you have access to more money, even if the money was really yours to begin with, you have a choice: buy more stuff or create stability. During good economic times, most people choose to buy more stuff. Why? Because, apparently, we have tremendously short memories.
The U.S. economy is currently doing well. As of the fourth quarter of 2017, overall economic growth was about 2.6% on a quarterly basis. But that doesn't reflect some other, more troubling, economic indicators. For instance, the personal savings rate has slumped to the third lowest level on record.
These two contrary indicators are actually related. The economy is relatively healthy because people are spending a ton of their money, and saving close to nothing. With our paychecks bigger, the government is depending on you to spend even more. As we spend more, our personal savings rates falls even lower.
Don’t fall for it
If you want to truly benefit from strong economic times, create financial stability by increasing your personal savings rate. All economies eventually have downturns. There will be another recession. It could arrive this year, next year or five years from now. But if you want to remain financially secure when it happens, you must do the opposite of what the government wants you to do.
Do you ever wonder why you don’t hear our government leaders more prominently promoting savings? When was the last time you heard a passionate speech by any of the mainstream leaders on either side of the political aisle promoting the merits of financial personal responsibility? It's been a while.
I’m not worried about so many people taking my advice that it will tank the economy. The economy will however eventually tank again on its own merits, and those who chose to not use the tax cuts to create stability will be in a worse position. They may even have increased their dependency on that increased level of income. High-income Americans are partially insulated from what comes next, but middle-income families will get hurt significantly.
Financial life as a metaphor
Let’s say we’re all squirrels. We’re squirrels beginning to think about preparing for winter. There are only so many acorns to go around at any given time. We get more in the fall but fewer in the winter, so we need to space out our consumption (budgeting). As we begin to store our acorns for the winter (savings), we must regulate what we eat (spending) in order for our acorn stash to grow. If we find more acorns but just chow down as we find them, then winter will sting more from a lack of stashed food. However, if we maintain or even decrease our consumption and put away enough acorns, then winter won’t be so bad.
Of course, there are differences between you and money and squirrels and acorns. Winter always comes. Squirrels know this, despite their lack of calendars. And as far as I know, there isn’t acorn inflation. But you know what? Recessions and periods of economic ugliness always come too. We just don’t have the calendars that tell us when.
Which squirrel are you going to be? The one that finds more acorns and thinks they’re at some sort of royal squirrel feast? Or are you going to be the squirrel that wakes up one day and says “it's spring already”?
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.