The law of household economics: Windfalls go poof.
Posted on June 24th, 2008 – 12:25 PMBy Kara McGuire
I know you’ve been there. You get a windfall and as soon as it comes there’s an unexpected expense that swallows up the windfall. Karen Blumenthal at the Wall Street Journal had an entertaining piece today about what she calls The law of household economics. She says, perhaps that’s why the well-intentioned Americans who said they planned to save their stimulus checks or use them to pay down debt are spending them instead.
Just yesterday, I met with Richard Davis, CEO of US Bancorp, who said the bank certainly isn’t seeing any of our stimulus checks coming its way– either in the form of savings deposits or larger credit card payments.
There’s another effect plaguing our household. I’ll call it the pre-windfall spending effect.
You know you’re about to get a lump sum. So what do you do? In the months or weeks preceding, you feel a little more flush and spend just a little bit more on things. For one friend, it’s high quality cheese. For me, it’s an outfit here, a pair of shoes for the kids there, a dinner out, a week without packed lunches.
Until, bam! The check arrives along with the credit card bill and you find that half of your windfall is heading back out the door.
To push that depressing thought out of your head, read Joel Stein’s latest LA Times column, which ran in our paper today. The funny guy doesn’t normally take on the markets, but today, he talks about profiting from the next bubble. What will be the next bubble, he wonders, and asks an economist for his ideas. I wonder if you can invest in chickens in a self-directed IRA?
8 Responses to "The law of household economics: Windfalls go poof."
Still waiting for my check as my SSN ends in “88″ so it’ll be in July sometime. I still plan to spend the max of $1200 on Cub gift card and get the 10% extra free. I also heard from a friend that you also get the Holiday gas discount coupon on both ends of the deal so that’ll add up to $25.20 off future gas purchases. $12.00 when I buy the cards and $13.20 when I spend them.
Of our $1,200 stimulus check, $1,000 paid the credit card down to $0.00. There were some unexpected (and pretty large) costs for my wife’s schooling. The stimulus check was very timely.
The rest, we each took $100 to spend on whatever.
No savings, but nice debt reduction. Without the stimulus check, we would have carried that balance forward for a while.
Jim
You know, this happened to me. We got the stimulus check and just so I didn’t spend a little more here and there I immediately put it towards our second mortgage. Well a couple weeks later I we find out our water heater is leaking and we need a new one- $800.00, car ins is due for $400.00 and I have to get a serpentine belt replaced on my car for $160. I’m kind of kicking myself. I know we’ll be better off in the long run but it would have been nice to pad our e-fund a little more.
I drank my stimulus refund up in two days.
How’s the economy?
Did I make a difference?
I paid my midwives the last 1,000 for my homebirth which was nice to get done. With the remiander we bought a new bed. I think normally we would not have spent it so wisely but we planed well this time around.
I have a seperate question about savings…. I have about 200$ extra each month and I was wondering what would be best. To save it in a money market account to build up emergency fund, pay down student loan debt 20,000 6.75% or second mortgage 16,000 6.25%. All my bills are paid and we currently pay a little extra towards our mortgage but we don’t have much savings (3,000). Any suggestions would be great.
Slightly off topic:
Andrea, you are getting robbed on that serpentine belt expense.
Liz
Unless you are able to lower the rate on your student loans somehow, you would be better off paying that down with the additional $200. You do need an emergency fund, but if you have no credit card debt and some funds in the bank you are probably OK there IF YOUR JOBS ARE SECURE. (Big If!)
You should also redirect your extra morgage payment to the student loan unless it is so small it is insignificant.
