The case for discretionary spending in a recession

With fewer opportunities to travel and dine out, as well as more financial worries around the damaged economy and job market, Americans are stashing cash at an unprecedented rate.  

The latest government data show a personal savings rate of 19% in June. That's down from April's peak of 34%, when much of the country was in lockdown due to Covid-19, unemployment surged to almost 15% and consumer confidence crashed. 

To compare, the most we ever saved during the previous 2009 recession was a little more than 8% of disposable income.  

Assuming you have a steady stream of income, a good chunk in savings and zero credit card debt, is now an OK time to start spending again? That is, on things other than housing, groceries and masks? Should you spring for that new Tesla or commit to those home upgrades? With interest rates so low, maybe there's even merit to financing the expense? 

In the current climate, the thought of spending on anything that's not a "necessity" can, to some, feel irresponsible — even when you have your financial ducks in a row.

For example, someone recently asked me about proceeding to use a home equity line of credit (HELOC) to remodel her kitchen. She's been planning the project for two years, has already purchased the cabinets and has a stable income. But part of her wonders if she'll regret her beautiful new kitchen if she faces a financial setback down the road. And might it even be insensitive to make a splashy purchase when so much of the country is pulling back? (Technically, she would be contributing to GDP growth and helping the economy, but I get it.)

In this case, and in many others, I'd argue that moving forward with the plan to spend is the rational choice, so long as a few caveats are kept in mind. If you're stuck on a financial decision, here's what to consider: 

Have a firm cash position. Cash is paramount right now. If you made this purchase, how would it impact your liquidity, the money you could quickly access if you were to get in a bind? It is likely more than affordable if, afterwards, you still have enough money to cover a minimum of six to nine months-worth of necessary expenses. 

I suggest this time frame because even though it's a hard job market right now, if you fell out of the workforce, there's a good chance you could get back on your feet within the year. Currently, the average amount of time it's taking for an unemployed person to find a new job is about 18 weeks.

Let's say you're eyeing new living room furniture that will cost $5,500. As long as that doesn't eat into your rainy-day savings by much or at all, you're in the safe zone. You could still make the purchase, but just commit to refueling your savings over the next four to five pay cycles if need be.  

Be clear on the cost benefits. Will this expense pay off? Will it make your life better or easier? A purchase's benefits to our social and emotional well-being should count for something, especially in these times when we're more stressed and anxious. Sure, you could continue working at the kitchen table using your 2006 Macbook pro, but if turning a spare bedroom into a home office and buying a newer laptop offers you the productivity, privacy and comfort to be ten times better at your job, then it's a fine investment in my book.  

Make financing feasible. Taking on debt to spend on something that's not an actual need in a pandemic-recession sounds kind of backwards on paper. But in reality, financing a purchase at today's low interest rates isn't a bad idea, especially if it's one that could provide you with more mobility, freedom and happiness, such as a vehicle.

Let's go back to the needing cash in the bank. If financing provides you with the ability to stay more liquid, and you can very easily pay down a cheap loan with your paycheck (and in a worst-case scenario, with your rainy-day account), then there's little to fear. 

All the while, be smart about what you're buying. If you want a car, consider a certified pre-owned model and show the dealer your researched cost-comparisons to negotiate the lowest possible price. After all, just because you can spend, doesn't mean you should pay full price. 

Same goes for the kitchen remodel you've been dreaming about. We're spending nearly all of our time now at home, so allocating funds to make the space more accommodating and pleasure-filled is money well spent. Following the above steps, a home renovation spells low-risk and high-reward. If you're fortunate to score a home equity line of credit, since some major lenders have stopped providing them at the moment, aim to use only what you can pay back within the next year. To keep it comfortable, keep your monthly HELOC payment balance to no more than 10% of your monthly budget.

Quit the guilt. If you're feeling bad about spending big bucks because it's not a good "look" right now, remember that shopping is not a zero-sum game. Buying something for yourself doesn't mean that someone else necessarily goes without. But I understand how it can weigh on one's conscience. 

My advice: Rather than feel guilt, feel grateful for your advantages and being in a position to afford this expense. It's proven that expressing gratitude helps lead to more happiness, better relationships and improved health among other benefits. If the purchase is still weighing on you, consider donating your time, money or belongings to the causes you feel most passionate about. You can always find ways to meaningfully give back, especially now. 

Farnoosh Torabi is a financial journalist, author and host of the "So Money" podcast.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.