Pride comes before a fall, right?
That’s what comes to mind when I think about consumer confidence, which was at an 18-year high last month.
It’s not that I think consumers don’t have a reason to be confident. I just can’t help but remember that, the last time consumer confidence was this high was in 2000.
We entered a recession in 2001.
After that, consumer confidence hit its highest again in 2007. It was so high, in fact, that people were buying houses they couldn’t possibly afford.
Of course, you know what happened in 2008.
That housing bubble popped and we found ourselves in the biggest mess we’d been in since the Great Depression. Some of the people who bought those houses ended up living in literal tents.
Let me be crystal clear: I’m not saying the market is going to crash or that hard times are coming. I can’t predict the future, and anyone who tells you they can is selling something.
I’m also not dismissing the very complex factors that go into economic ups and downs.
None of that is the point.
The point is that our attitudes about money should remain consistent, no matter what is going on in the world.
That means we don’t go spending like rock stars when the economy is good, and we don’t cling to every cent and stress out when economic news is scary.
Basic money principles remain the same in good times and in bad. When we stick to the fundamentals, we stand a better chance of being OK, no matter what is going on in the rest of the world.
Those fundamentals can be summed up like this:
• Spend less than you earn.
• Avoid debt
When consumer confidence is high, we tend to spend more, save less and take on debt. Something tells me, that’s the direction some of you might be headed right now, if you haven’t started already. If so, I’m here to suggest you pump the brakes.
Sure, you’ve gotta strike the right balance. You can’t be so tightfisted that you miss out on good investments or adventures, but you can’t live like you’ll never have to pay the piper, either.
Ignoring outside influences is not easy. It’s easy to get swept away by the prevailing sentiment.
Just ask Nobel Prize-winning economist Richard Thaler.
You might remember him from the movie “The Big Short”, which also happened to be about the housing crisis.
In the movie, he explained the so-called “Hot Hand Fallacy”, in which someone who experiences a lot of wins or losses in a row expects the streak to continue. He likened it to someone on a winning streak at a Blackjack table. That someone, played by Selena Gomez, has already racked up lots of chips, is holding a good hand and the odds are in her favor.
She gets swept away by the cheering crowd, bets $10 million – and loses it.
And that Nobel Prize Thaler won?
It was for his work that showed, more or less, that humans are irrational when it comes to money.