Amid rising inflation and rising debt, “frugaling,” or spending more and saving more, has become a dangerous habit for cash-strapped Americans.
Although inflation eased in April, the consumer price index was still up 3.4% from the same period last year.
Despite rising prices, Americans continue to spend.
Credit card debt hit $1.12 trillion in first quarter so far, report says From the Federal Reserve Bank of New York.
“Consumers overreact to offers”
Retailers are ramping up promotions to cope with thin margins. According to data analytics firm Numerator, temporary price cuts increased by 72% between March 2023 and March 2024, and overall promotions increased by 15%. Free shipping, “buy one get one free” offers and minimum order quantities are successful ways for companies to entice consumers to “spend money.”
“If you’re spending more money because you’re now focused on the transaction rather than what you’re getting, that becomes very, very dangerous,” said Charles Chaffin, co-founder of the Institute for Financial Psychology.
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Personal savings rates — or the percentage of income people save — have been falling as households spend their pandemic savings and stimulus checks. According to the U.S. Bureau of Economic Analysis, it was 3.6% in April, compared with 32% in April 2020, a record high.
“Consumers are overreacting to promotions because they feel they have less money than they had before,” said Melissa Minkow, director of retail strategy at consulting firm CI&T. “It’s a weird combination of variables that creates this very unique retail environment.”
While waste isn’t always a negative, continuing to make unplanned impulse purchases can have a devastating impact on a consumer’s long-term financial goals.
“Fundamentally, if we take on debt that we can’t repay, it’s going to impact our credit score, and that’s going to have a huge impact on our ability to finance a home, a large purchase. No matter what,” Chafin said.
Watch this video to learn more.
