by joeplemon on January 27, 2010
in Budgeting
photo credit: F. Montino
As Janice and I have worked on our budget over the years, we have learned that the more we can automate it, the easier it becomes, the more we enjoy it and the greater our chances of sticking with it.
We want to feel like we are in control of our money, but we also want to relax, enjoy life and not be phobicized by every penny we spend. The following tips might sound sloppy to the nerds among us, but because of the simplicity they give to our lives, we are confident they will serve us well for a lifetime:
photo credit: KrissZPhotography
What is the Wealth Effect?
Did you know that recessions are good for your savings account, but a booming economy tends to drain your savings? It’s true. In April, 2005, when the stock market was booming, personal savings in the United States dipped to 1% but jumped to as high as 6% during the recent recession. Why this phenomena? Because we instinctively cling to what we have when times are tough, but we also loosen those purse strings when good times return. Meir Stratman, a behavioral finance expert at Santa Clara University, explains that this tendency, known as “the Wealth Effect”, has occurred predictably during past recessions and recoveries. The Wealth Effect occurs because we allow our feelings to trump our financial logic: when we “feel” threatened we save, but when we start to “feel” optimistic we spend.
