Spend, If You Can

Please take the following short quiz, answering each question with a simple yes or no:Is your household income about the same as or more than it has averaged over the past few years? Is your job reasonably secure? Are your financial obligations -- mortgage payment, car payment, school tuition, other family expenses -- about what they were last year? Are you saving about 10% of your gross income for all of your future needs combined -- emergencies, retirement, the kids' college, a major purchase?

If you answered yes to those four questions, you are among the fortunate folks who are faring pretty well despite this severe economic downturn. (And kudos to you for managing your career and your finances wisely.)

Because you are both fortunate and wise, Uncle Sam wants you to play a key role in America's economic recovery. How? By maintaining your normal levels of consumer spending and charitable giving -- and, if possible, even increasing them a bit.

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Acting as you normally would will help offset belt-tightening by those in genuine distress, who have no choice but to cut back, and by those who aren't in trouble but are cutting back anyway.

Reasonable response

Why are some people slashing spending even though their income is secure? One reason is a drop in their net worth, due to eroding home prices and financial assets.

It's the reverse of the so-called wealth effect, which caused people to spend and borrow more freely in boom times, confident that their net worth would keep rising unabated. Now, with their wealth declining, people are acting more cautiously even if their income hasn't been cut. That's a reasonable response. Unfortunately, overdoing it will aggravate the economic slump.

Another psychological factor is at play here: a desire on the part of well-off Americans to show empathy for their less-fortunate brethren by spending less. It seems that voluntary frugality is now as chic as high living was during the credit bubble in the middle of this decade. Nowadays, people who are still reasonably affluent are boasting about pinching pennies, eating at home, canceling trips and hanging on to the old car.

But I have news for them: If they really want to help individuals who are less fortunate, they should be doing precisely the opposite. Boosting their spending -- and their giving -- will help businesses forestall some layoffs and eventually put people who have lost their jobs back to work.

Sensible spending

I'm not talking about conspicuous consumption, which is wasteful and unseemly in good times and downright callous when times are tough. And I'm not talking about drawing down savings. I've been beating the drum of simple living for many years, and I'm not changing my tune now.

I just mean that in these difficult times, you shouldn't be embarrassed to trade up to a larger home that your family really needs and can afford. Or to trade in your old car for a new one that's more fuel-efficient. Or better yet, to boost your donations to schools, struggling arts organizations and social-service charities that help the needy.

If you can afford it, do your fellow Americans a favor by taking a family trip to a domestic destination. And go out to dinner a little more often. Restaurateurs, like most smart business owners suffering a falloff in patrons, are responding with value pricing.

Matter of fact, the whole U.S. economy is loaded with bargains, from Wall Street to Main Street. So while you're bolstering consumer spending, keep adding to your positions in well-priced U.S. stocks, and be prepared to hold them for three to five years.

The idea is to spend sensibly, with confidence and creativity. It's the best way to get the U.S. economy back on track.

Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.

Knight came to Kiplinger in 1983, after 13 years in daily newspaper journalism, the last six as Washington bureau chief of the Ottaway Newspapers division of Dow Jones. A frequent speaker before business audiences, he has appeared on NPR, CNN, Fox and CNBC, among other networks. Knight contributes to the weekly Kiplinger Letter.