How to Save by Spending

For long-term investors, spending on stocks and homes could build wealth.


In the past, two of the most secure ways to build savings were investing in the stock market and purchasing a home. In each instance, consumers had to spend a large sum of money in order to build wealth. In other words, these investments allowed consumers to save by spending.

But the spend-to-save paradigm is shifting. Obstacles to obtaining a traditional mortgage are vast, and Federal Housing Authority loans—which require a down payment of roughly 4 percent of the value of a home, compared with 20 percent required by most private banks—allow access to homeownership without the immediate benefit of equity.

[See Find Top-Rated Mutual Funds and ETFs.]

The stock market has also proven to be an unreliable investment. Volatility in recent years has destroyed many portfolios and decimated retirement accounts. Continued uncertainty in Europe, combined with political questions in the United States that won't be resolved until the presidential election in November, mean that violent shifts are likely to continue.

These factors have contributed to feelings of doom among consumers: According to the Thomson Reuters University of consumer sentiment index, confidence fell to 74.1 this month, down from 79.3 in May. This lack of confidence leads people to hold onto their money, which slows economic activity, reinforcing the broader financial slowdown.

But according to personal-finance experts, current economic conditions provide an opportunity for people with long-term goals to spend to save. If money is invested wisely, payoffs could come years down the line.

Historic returns, but a sweeping change. Investing in the stock market and buying a home were once sure-fire ways to build wealth. Since 1970, the price of a home went up consistently until the housing bubble burst in 2007. And while the market experienced cyclical ups and downs, stocks provided consistent returns over the years.

According to Lisa Kirchenbauer, president of Omega Wealth Management in Arlington, Va., recent years have shaken faith in these investments. The coming months will continue to be volatile, she says, adding to negative feelings about the economy. "We set up expectation that the international market is stable," Kirchenbauer says. "But we have to accept that things are going to be vulnerable for a while."

Given this uncertainty, Kirchenbauer recommends that investors have emergency cash reserves that can be used for support during rough times. "Everyone should have an emergency fund. The most important thing to do is to make sure you have some sort of cushion," she says. "There's no way you should be putting it in the market to make a quick buck."

[See 7 Ways You're Wasting Money Without Realizing It.]

Long-term opportunities outweigh short-term risk. Kirchenbauer says that while short-term investments in stocks carry heavy risks, long-term investments are likely to pay off.

"This comes down to, 'What is your strategy for your money?," she says. "People need to be clear about what their ultimate goal is. This will help determine how much risk an investor is willing to take with that."

For investors concerned with what their return will be in a decade, now is a good time to invest in stocks. They're relatively cheap, and nearly all economists agree that the market's current malaise won't last forever.

But Kirchenbauer warns that investors should temper expectations. "People need to have more reasonable expectations about rates of return. It will be later next year before the markets feel more comfortable," she says. "People still need to not expect that the market is going to go up 26 percent again. We've had times with double-digit numbers, but single-digit-rate-of-return expectations are more normal."

[See Beware Playing 401(k) Catch-Up Close to Retirement.]

The renter's dilemma. Despite hopeful proclamations from the real estate industry, the housing market continues to plod along. But according to Kirchenbauer, this market's failure to recover should not be a hindrance to qualified buyers.