Posted by Mike Smith :: July 17, 2008 @ 7:13 am

The government’s plan to stimulate the economy provided checks to most taxpayers in the hopes that they would go out and spend the money. If spending money is a way to stimulate the economy, then does frugal living hurt the economy?

Conventional thinking may trend the short answer to that question closer to ‘yes’ than ‘no,’ but there are many factors that influence the true effect of frugal living. Here are a few in favor of frugality:

• The sad truth is that most people are not frugal. The one upside of this fact is that your frugal living, while beneficial to you, is too insignificant to harm the overall economy in any noticeable way. If everyone started living frugally, the global economy could suffer, but the un-frugal habits of the majority more than make up for the potential economic drain of the minority of us living frugally. A new balance of production and consumption, even if lower in relative terms, may actually be more efficient.
• Frugal living will give you more money to invest, which creates even more money to stimulate the economy later.
• Putting your money to more efficient use (i.e., being frugal) also allows you to maximize the stimulation effect of each dollar you spend. Money wasted is ultimately a drain on the economy.
• Being resourceful and getting maximum use out of what you have lowers demand. That means that more of the earth’s resources are available for future demand. Stated another way, money taken from the economy today may allow much more money to be added to the economy in the future.
• Many of the goods we consume are produced overseas. Frugal living would help to balance or reduce our trade deficit, which could stimulate the domestic economy and strengthen the value of the dollar.

It’s difficult to summarize the effect of frugal living into a single word like good or bad. What can be said with certainty is that your personal finances will see a direct benefit from frugality. The hyper-consumption common in our society would likely benefit as a whole from a reduction as well. Even if a massive trend towards frugal living did have some negative economic effects, it is an extremely unlikely event, so your personal benefit stands to remain high.