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How I'm Saving Way More Than the Chinese

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Last month, my family set out to see whether we could save as much as the average Chinese family: 25% of our take-home pay, according to the best estimates I could find. We were motivated partly by necessity -- an expensive foundation replacement on our home -- and partly by a desire to see what world-class thrift really feels like, and how difficult it might be for us notoriously leveraged Americans to pull back on consumption.

Well, the numbers for the first month are in, and I'm happy to say that we met our goal and then some. Without further ado, the headline number: During August, the first month of the effort, we saved (drum roll … 55% of our take-home pay. Wall Street would call that a huge earnings beat. My stock should be soaring.

Take that, China! Except, well, I should probably mention a few caveats.

First, for this to mean anything, a little context: If we were independently wealthy, living off trust funds or something like that, saving a huge chunk of take-home pay would be easy.

But we're not. For the most part, we're a one-income family with a reasonable middle-class income. That's a world of difference from, say, a rural Chinese farmer, but it puts us in the same boat as a lot of Americans.

Corporate America's bare cupboards
Of course, one month does not a trend make, and there's at least one reason why it will probably be difficult to keep up this pace of savings: inventory reduction.

In our case, we started the month with a pretty well-stocked freezer and pantry, and ended the month with them pretty bare. Inevitable but not time-critical expenditures, like clothing, we simply put off.

So I took a look at the balance sheets of some large American companies, many of which appear to be doing the same thing:

Company

Inventory 3Q 2008 (millions)

Inventory 2Q 2009

(millions)

Change

Toll Brothers (NYSE: TOL  )

$4,128

$3,475

(15.8%)

Weyerhaeuser (NYSE: WY  )

$3,025

$2,307

(23.7%)

Ford Motor (NYSE: F  )

$12,048

$6,603

(45.2%)

Alcoa (NYSE: AA  )

$3,844

$2,493

(35.1%)

Dell (Nasdaq: DELL  )

$1,109

$839

(24.3%)

Nucor (NYSE: NUE  )

$3,146

$1,268

(59.7%)

Sony (NYSE: SNE  )

$12,882

$8,660

(32.8%)

Indeed, according to the Bureau of Economic Analysis, the value of inventory held by businesses decreased $310.5 billion over the past three quarters. Inventory reduction was responsible for 2.36 percentage points of lost gross domestic product in the first quarter alone.

Second-guessing the recovery
One of the articles of faith for those bullish sorts who believe in a "V-shaped" recovery is that the productivity gains companies have made over the past three quarters -- often by firing thousands of workers and asking the very nervously still-employed to pick up the slack -- will translate to explosive earnings growth once demand picks up again. Margins have improved, after all, and if those improvements hold, these companies will be more profitable than ever.

But you know what? I just reported fantastic margins for the month of August in part because of inventory reduction. Yet I'm going to have to restock the pantry eventually, and when I do, those margins are going to drop. OK, it's not exactly the same thing -- my inventory isn't tied to my ability to profit, but rather my ability to survive. Nevertheless, you're going to see similar margin pressure offsetting productivity gains at some of these companies. They may be able to do more with less, but they're also going to have to boost spending on creating more inventory as demand ramps up. I feel their pain.

How it feels
"Happy families are all alike," begins Leo Tolstoy in Anna Karenina; "every unhappy family is unhappy in its own way." Not to sound a sour note, but replace the word "unhappy" with "spendthrift" and you've got a pretty good indication of why one person's financial advice doesn't always apply to others. We all have our own obligations, necessities, and habits, and even our "optional" spending can be very hard to alter. Your own mileage will vary, of course, but the best thing you can do is lay out a few months of your true spending and see where your money is going and where it has to go.

Our biggest personal change had to do with our eating habits -- almost zero dining out, few of our typical lavish home preparations, better management of ingredients and leftovers. This, incredibly, shaved almost two-thirds off our monthly food bill. The rest of our savings came down to almost entirely avoiding discretionary expenses and simply being lucky enough not to get hit with any big surprises for a month. (The garbage disposal broke, but I fixed it for $1.95 in parts.)

As the month ended, though, savings fatigue was setting in. We hadn't done much of anything for weeks. My wife and I need a date night. My hope is that we can relax a wee bit without falling into old bad habits. I'll be back in a month or two to let you know.

Saving money is a lot less difficult and a lot more fun if you're not doing it alone. So if you're in the same boat as I am, write to me with any ideas or tales of personal sacrifice and success (or failure). I'll take all the help and advice I can get.

Karl Thiel doesn't own shares of the companies mentioned in this article. Dell is a Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 22, 2009, at 10:14 PM, glenby52 wrote:

    Not only are inventories being depleted, but those remaining workers who are stretched now will be even less likely to be able to pick up when the economy returns. Companies who have "met or beat" expectations will have to replenish their "inventory" of workers who will need training with a resultant reduction in quality and productivity until they become proficient in their work.

  • Report this Comment On September 23, 2009, at 1:49 AM, StockEse wrote:

    Nicely done, Karl!

  • Report this Comment On September 24, 2009, at 6:06 PM, bridgetoneil wrote:

    Interesting Karl. I too took this summer to investigate whether or not I could save money using coupons, researching which stores has specials and store coupons and by stockpiling. I may be saving some money BUT, what of my time with researching, clipping, driving to different stores etc. Not sure that in the long run it was really worth it. What I think I will do is stick to a couple stores, shop specials as much as possible and stock up when things we use regularly are cheap. Check out tips by "The Coupon Queen", Jill Cataldo. If you do, let me know what you think.

    Deirdre

  • Report this Comment On September 26, 2009, at 2:54 PM, NZMillionaire wrote:

    Coupons almost always turn out to be nothing more than advertising, Deirdre. There's a reason companies offer them: they make more money from you in the long run. I only pay attention to coupons or sales that offer more than 30% off, and even then I make sure the price after discount is less than a bargain competitor's regular price for similar product.

    Stocking up on specials can be an excellent strategy though. Every fourth of July I buy dozens of cases of soda at 1.99 a case. If I had more room, I'd buy a year's supply.

  • Report this Comment On September 26, 2009, at 3:14 PM, Sozurmama wrote:

    SAVING?! YOU ARE DESTROYING THE ECONOMY!

    Luckily the government is spending your money for you :)

    god bless america

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