Eldon Dryden Pence III serves as the Chief Investment Officer of Pence Capital Management.
As a child of the Great Depression, my father used to keep what he called a “BS account” at the bank. Every month, he contributed money to this savings account and whenever it reached a certain level, he would spend it on something for the family—usually a great vacation.
America’s current spending habits and consumer confidence are certainly at the top of our minds, particularly after a troubling March readout. Consumer confidence is a standard predictor of how well the economy performs, but it doesn’t tell the whole story. We can analyze trends to better understand how to make our money work harder as consumers and investors.
Younger generations have much in common with my dad. With an eye toward experiences over things and with the benefit of technology, their spending preferences are changing the face of consumer behavior. Despite some headwinds, there’s a lot to gain as long as they stay true to some of the golden rules of personal finance and reconsider a few new ones, too.
Be careful with credit.
Sound financial advice has always been to pay yourself first. That is, ensure that you are growing your personal emergency savings and retirement funds with every pay period. This axiom has stood the test of time, yet the personal saving rate was still below 5%, as of February.
What’s happening here?
According to the Q4 2024 report from the Federal Reserve Bank of New York, household credit card debt set a record $1.21 trillion. Credit card debt is high because the economy has grown alongside wages, and consumers love shopping on credit. The ratio of disposable income that consumers spend on servicing consumer debt is still below pre-pandemic levels thanks to a period of low interest rates and strong income growth from sources outside of wages, such as corporate dividends, interest payments and Social Security.
Many consumers are making more money and charging purchases instead of drawing down from a savings account. This makes sense, given that today’s credit card companies offer attractive options for clients: cash back, signing bonuses and transferable points to partners at airlines and hotels.
However, there needs to be some dramatic rebalancing: A new survey from Bankrate shows 33% of respondents have more credit card debt than emergency savings. Paying yourself first has never gone out of style and must once again be prioritized for those unexpected life events.
Credit rewards can’t outwork the fees you’ll pay banks if your debt becomes overwhelming. Ensure that you manage your credit effectively to continue building wealth.
Consider your own consumerism.
We’ve pondered the differences between wants and needs from a young age. People want more experiences, and technology has democratized our access to them.
The skyboxification of America, which afforded the ultra-wealthy access to luxuries that the lower to middle class could not, has been shattered. Twenty-five years ago, you had to have your own private chauffeur to ride around in SUVs seeking an upgrade over a yellow taxi; now, almost anyone can choose Uber. Today, you can gather friends and split the cost of a luxury rental home without breaking the bank.
This is an investment signal that is not waning.
At the end of 2023, 48% of Americans had a passport, up from 3% in 1989. Further, McKinsey’s State of Tourism and Hospitality 2024 report shows that global travel has since bounced back from pandemic lows when it fell by 75%. Moreover, according to recent data from Kayak, international airfare costs 4% less this year than last. The chokepoint to international travel is not the cost but rather the burden of applying for travel documents.
Investors should take notice: They want to be where people spend their money.
Costs are high—from housing to experiences.
According to the National Association of Realtors’ 2024 Profile of Home Buyers and Sellers report, the median age of first-time homebuyers recently hit a record high, clocking in at 38 years old, and a study from Redfin (registration required) shows they must make at least $76,000 a year to afford an average starter home in the U.S., an increase of 8% from 2023.
It’s hard to blame Gen Z for living the rental lifestyle—even reluctantly.
So, while younger generations (and beyond) might not necessarily be budgeting for that large downpayment anytime soon, it’s still important to budget for experiences, such as a trip to Disney World, which can rival the cost of international vacations.
There are many ways to do this, from starting your own “BS savings account” like my father did to more innovative ideas such as fractional ownership of everything from vacation homes to airplanes to boats.
Every dollar is a vote.
What we know about the Federal Reserve’s future decisions or the threat of inflation won’t likely change consumer behavior this year, in my opinion. We’re committed to our desire to make memories and our philosophy on what’s really important in life.
Every dollar is a vote: You can spend $20,000 on a new car to add to your balance sheet or a month of global travel. You choose to spend it on one item or another. We can vote to accumulate a down payment for a house or a memory.
With National Credit Education Month behind us, think beyond the basic saving principles to propel your wealth-building journey. Look at where your investments sit, reconsider your credit debt and above all, consider that BS account.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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