Coupon clippers and other frugal types are under constant scrutiny by those who are eager to call them “penny wise but pound foolish.” “You might be saving pennies there,” the naysayers say, “but you waste dollars on the big things.” While penny pinchers who overlook big savings are common enough to make “penny wise but pound foolish” a clich
The drumbeat of recession talk continues to grow louder in the media and amongst financial analysts. The housing crisis, the credit crunch, high energy prices, the falling dollar, inflation, and slowing consumer spending are all contributing to a troubled economy. While no one can see into the future and know for certain whether or not there will be a recession in 2008, it’s not unwise to take a few steps now to protect yourself in case a recession does come to pass.
The biggest problems people face during a recession are layoffs and inflation. Both put a strain on the family budget, but neither is insurmountable, particularly if you do a bit of planning and saving beforehand to protect yourself. Here are some simple steps you can take that will help you ride out a possible recession without too much damage to your financial picture.
First, retool your resume, start networking, and pick up some additional skills to increase your marketability. If the economy tanks, companies will have to cut spending and this often means layoffs. You should be prepared for a job hunt, particularly if you work in an industry or for a company that is particularly shaky. Having an updated resume and a rolodex full of contacts gives you a head start should a layoff happen. Use this time to learn new skills such as new software programs, business management, a foreign language, etc. The more skills you have the more valuable you are, both to your current employer and a prospective employer. When layoffs happen, companies usually let the least skilled, least valuable workers go first. Additional skills may act as an insurance policy for your job if the worst happens.
Second, start putting more money in your emergency fund, or start one if you don’t have one. If you get laid off, you’ll need to rely on your emergency fund until you find a new job so start pumping some extra money in there. Keep your emergency stash in an account with no withdrawal penalties, and make certain you’re getting a good interest rate.
Third, start curbing your spending now, rather than waiting until you’re forced by circumstance to do so. Cut down on unnecessary spending and use that money to fund your emergency fund. Maybe you want to put off some travel (particularly international travel since the exchange rate is so poor right now), home remodeling, a car purchase, moving, or other big expenses and instead save that money in case you need it. The less you live without now, the more money you’ll have saved if you have to go without a paycheck for a while. Those who wait until the layoff happens to slow their spending are starting from behind.
Fourth, refinance or pay off any debt that’s at a variable interest rate and don’t incur any additional debt. This includes credit cards, adjustable mortgages, home equity lines of credit, etc. Interest rates are probably going to go up and this will increase your payments. In the case of credit cards, if you are laid off or have other financial problems that cause you to miss a payment or pay late (on any bill, not just the card in question), you are subject to their “universal default” policy which basically means that if they see something on your credit report they don’t like, they are free to raise your rate sky high. For this reason, don’t take on any more credit card debt, particularly if you feel like hard times may be ahead of you.
Fifth, learn money saving and frugal skills now. Learn how to cut your grocery bill by using coupons and shopping the sales. Try stockpiling food bought at low prices to avert price increases and to have a stash in case you need to cut spending even more. Learn which stores have the best prices on which products. Become familiar with the consignment and thrift stores in your area and their offerings and prices. Learn how to do more for yourself such as lawn care, home maintenance and repair, and cooking. Cut your utility bills by conserving power, water and fuel. Cut your gas bill by driving less and consider trading the gas guzzler for a more fuel efficient model. Every bit of money you can save by doing something cheaper or on your own is more that you can save in case you need it. You’ll also curb some of the effects of inflation on your budget.
Sixth, get the advice of a professional financial advisor that you trust to help direct your investment strategy. I’m not a stock market guru so I can’t tell you where you should be investing money at this time. But there are plenty of professionals out there who can help protect your investments in a troubled economy. If you have a lot of money in stocks or bonds (this includes 401k’s), get some help from a professional. They’ll advise you as to which “safer” areas are good bets for earning decent returns during a recession.
We don’t know for certain that a recession is coming and, if so, how bad it might be. But there are indicators in the economy that we might be heading that way. Don’t be caught by surprise. Take some steps now to protect your financial future. What’s the worst that can happen? You’ll save up a bunch of money, be prepared to look for a new job, become more self reliant, and take some steps to protect your investments. Not a bad strategy, even if we don’t have a recession.
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It’s very frustrating when people who don’t know us well attribute our decent financial situation to “luck.” As in, “You’re so lucky that you don’t have debt,” or, “You’re so lucky not to have to worry about your bills.” The conversation usually ends with the other person saying something along the lines of, “I wish I could be as lucky as you.” Of course, good manners dictate that I don’t scoff at their kindly meant words, but I want to tell them that they could be in the same situation as I am, even if they aren’t “lucky.” Because luck had nothing to do with it.
Luck is defined as success or failure apparently brought by chance rather than through one’s own actions. None of our financial success came from anything associated with luck. Everything we have accomplished has come through hard work, discipline, and patience, not some random turn of fate.
Do I believe that there is an element of “luck” involved in personal finance? Not really. Most of what happens with our finances is directly related to our actions, not luck. We make the decisions to spend or save, to wait for a purchase or to give in to the impulse to have it now. We decide whether to go to school so we can get a better job, or to remain where we are. We decide whether to buy insurance to protect our belongings or to take the risk of going without. We decide whether to keep an emergency fund in place to ward off so-called “bad luck” or to spend every cent we make now. We decide whether to save for retirement or hope that an inheritance will bail us out.
Some things may seem like luck (good or bad), but they’re really just life events that happen to everyone at some point. Some people say they have bad luck if they get ill or laid off or face some other financial difficulty. I don’t think it’s that you’re unlucky, it’s just life. Everyone has troubles, illnesses, and financial crises at some point in their lives. The downs are as much a part of life as the ups. It’s how you deal with them and prepare for them that determines your financial future. Not “luck.” Is it “good luck” if you get a major inheritance or win the lottery? Not really. You decided to buy the lottery ticket and take the risk, and someone worked very hard to be able to leave you that money. It’s not “luck” that you got that money, it’s tied to decisions made and actions taken.
The fact that we are debt free and financially comfortable is not the result of luck. We worked hard for the money we earned, sometimes working multiple jobs when necessary. We were disciplined enough to always live below our means, however small or large those means might have been. When it became apparent that further education was necessary to earn more money, we went back to school. We were patient and waited to buy things until we saved the money, rather than buying on impulse. We chose our purchases wisely, buying items that were good quality but not the most expensive thing on the market. We looked for deals and bought a lot of stuff used to save money. We saved for retirement and made sure we had an emergency fund so we could weather layoffs, illnesses and other losses. We avoided debt unless it made very good economic sense, such as to buy our home. We educated ourselves about finance and financial products so that we could make informed decisions, rather than relying on the advice of those who didn’t know us or our situations.
We’ve had our share of problems; bad luck if you want to call it that. Life hasn’t always been rosy and sweet with the money rolling in. There have been tough economic times in our household but we’ve kept to our plan, adjusted our spending and, if we haven’t been able to get ahead, at least we’ve stayed even until the bad times have passed. We’ve never had an inheritance or won the lottery. Money has never once come into our lives that we didn’t earn. We’ve worked, planned, and saved to have our current lifestyle. There wasn’t any luck involved.
When people tell me that I’m so lucky to be where I am, and that they wish they could be as lucky, I want to tell them that anyone can be in this situation without luck. It does require discipline and planning. You have to be willing to live below your means, even if that means being uncomfortable at times. You have to sacrifice some wants now in order to secure your financial future. You have to save, both for the short term and the distant future. You have to have a plan and stick to that plan, even when life gets in the way. You have to educate yourself about finances and make informed, proactive decisions. You can’t just wait around and hope that you’ll get lucky and money will fall from a tree as you pass under it. If you wait for luck to make you financially secure, you’ll never get there. Am I lucky to be debt free and financially secure? No. Am I hard working, disciplined, happy, prepared, anxiety-free, and able to enjoy life? You bet.
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If I were to ask the average person what makes a Lexus better than a Kia, an outfit from Nordstrom better than one from WalMart or a Coach purse better than a Canyon River Blues one, the most common response I would probably get is “quality.” Now I’ve always been one to try to spend the minimal amount possible on the items I buy. If I can get a shirt for $2.99, I get excited. Friends of mine who spend more on the same item often justify it because their item is higher quality.
I can understand the draw of wanting an item that will last a while and hold up through wear and tear – nobody likes it when their stuff breaks. But at what cost is this “quality” worth it? It’s obvious that higher quality items cost more money than “average” quality items. The big draw for this is that the higher quality item will last a lot longer. The way I look at it, however, is that the money I can save and invest by spending less on an item (and multiple items) will most likely last a lot longer than that product (or my need to use or wear that product).
Here are a few things that I personally don’t think are worth paying more for “better quality” (at least at this point in my financial journey):
Automobiles: First of all, I admit that I’ve been known to drool over Lexus’s and BMW’s. They are nice cars with some very handy features. However, at this point in my life I would never consider paying $30,000+ for one of those vehicles (even if it came with a full time chauffeur!) Since our household income isn’t exactly in the 6 figures (or even close) it would be a misuse of our resources to spend a big chunk of money on a car like this, simply because it’s “better quality.” My Honda Civic is actually a great quality car for a MUCH lower price.
In addition, the initial high price of these cars, they also tend to be more expensive to fix. Luxury car parts tend to cost more than your average Honda or Toyota parts (probably because they are “higher quality”) Because they are more expensive to fix and replace, that means they are also more expensive to insure. And since car buyers in the market for a luxury car don’t tend to be worried about high prices and costs, less effort is given to making the car more economical and fuel efficient, while more effort is given to add extra features, like the ability to parallel park itself. The prices add up on these “higher quality” cars. Personally, I’d rather save the money and parallel park myself.
Clothes: It’s commonly thought that a $3 shirt will probably last you a month or two, while a $100 shirt will most likely last almost your entire lifetime. Even if that’s true, I’d still rather have the $3 shirt. For one thing, I personally can’t wear the same clothes over and over and over without getting sick of them. I like to change things up and wear new things. I don’t like my wardrobe to get stale. So for me to buy a $100 shirt that I will eventually get sick of and want to get rid of anyhow is pretty silly. Even if I didn’t get sick of the $100 shirt, chances are it will go out of style in a few years anyway and it will find its home in the back of my closet with all the clothes I never wear. Then I would get sad every time I see it because I’d think of all the money I wasted on it.
On the flip side, there are those pieces of clothing that are timeless and will never go out of style and can be worn year after year. Like the long black wool button coat I recently bought to wear to work on those cold winter days. The nice thing about this coat is that it can be worn with jeans or dress clothes, it’s black so it matches almost anything, and it keeps me nice and warm. A coat like that can easily go for $100+ (most likely a lot more). The best thing about my new coat? It only cost me $40. Instead of shopping at a department store and spending hundreds of dollars, I went to a store similar to Ross and got the same coat for a lot cheaper. Now I’m so happy that I have a nice “quality” coat that I didn’t spend a fortune on.
Electronics: It’s always nice to have the highest quality newest electronic item on the market, but that comes at a high price. Believe me, I’ve paid that price in the past. About 5 years ago I was in the market for a new cell phone. Camera phones had just come out and I found the coolest one for around $400. I love taking pictures so the idea of having a camera on my cell phone was really a draw for me. Plus, no one I know had one at the time. So I forked over the $400 and was the only person I knew that had a camera phone. Until a week later. About a year later it seemed that everyone had camera phones and they paid a lot less than I did. Plus they had extra features like a video camera and their phones were smaller than mine.
If I could go back in time I would not have bought that phone and invested the extra money instead. Had I not learned my lesson from that experience, I probably would have been first in line to buy an iphone a few months ago. But I have stayed away from that ridiculously expensive phone and stuck with my basic camera phone that works just fine. I now see it’s silly to spend so much on such a “quality” item the second it comes out.
Eating Out: Somebody really enjoy the high quality of an expensive meal. I suppose once in a while it isn’t bad, but personally I don’t want to literally eat away my money. Granted, Red Lobster tastes a lot better than McDonalds, but eating at Red Lobster all the time will really set you back financially. If you really want to eat some better quality food, considering sharing a meal at a nice restaurant or perhaps order one of the least expensive items on the menu. You can also buy quality seafood/meats on sale at the grocery store or meat market and make your own high quality meal at home for a lot less.
Then there is Starbucks – said to be the highest quality coffee there is. Granted, I’m from Seattle so I share this opinion myself. If I could go to Starbucks everyday for free I would. Unfortunately it’s not free so I don’t give myself the luxury of going there everyday or every other day. I do however brew it at home. I use Starbucks coffee at home in my Barista Espresso Machine and make my own lattes at home for a lot cheaper. And I’m not giving all my extra money to Starbucks’ bank account.
Now most of this is more directed to those younger people who are early on in their financial journeys. I belive those who are older and have been wise with their finances and have built up a nice net worth should be able to enjoy quality items. And I understand that some people may need to spend more in a certain area for quality (such as a nice car for someone who drives high end clients or nicer appliances for someone who cooks for a living, but if spending that extra money doesn’t help you make more money, is it really worth hindering the building of your financial foundation for a little extra “quality”?
Image courtesy of KB35