When economic times turn tough, governments urge their citizens
to spend. Economists think of citizens as "consumers" and rely on them
to put their "disposable income" to work. By doing this they will
support the economy, which translates into higher stock prices.
However, in times like early 2008, when consumers were reeling from the perfect storm of inflation, a global credit crunch, a global housing market in decline and concerns about stagflation,
there is often a conflict with the governmental cry for consumers to
spend. It's a bewildering scenario. What's the best course of action for
a concerned consumer to take? The following five strategies provide a
road map for surviving economic downturns.
1. Don't buy what you can't afford.We
all want that designer sweater, leather handbag, or cute sports car,
but most of us just can't afford to make the purchases. There's a simple
solution to this dilemma. If you can't afford it, don't buy it. This is
often the easiest point to understand, but it is one of the hardest to
implement when all those goodies are staring you in the face and all
your credit companies are telling you it's OK.
2. If you can't pay cash, you probably can't afford it.In our credit crazy world, amassing debt no longer carries a social stigma. Everybody has a car payment, a house payment and credit card
payments. Well, remember what your mother said about everybody jumping
off of a bridge? Just because "everybody" is doing it, doesn't make it a
good idea. Buying something you can't afford now, especially when the
economy is unsettled, can double the pain of paying later. For example,
if you purchase a $450,000 home today and the market goes into a slump
and devalues your home by $200,000, you will be paying the bank twice
what the home has come to be worth. Just because it was easy to get the
credit to buy that home, doesn't mean it was the right time for you to
buy in.
3. Paying interest on anything makes somebody else rich.When you pay interest on
a purchase, you are overpaying for that item for the luxury of getting
to use it now. The simple act of paying interest means that the price
you are paying to make the purchase is greater than the sale price of
the item. You are giving away even more of your hard-earned money in
order to own that item than the manufacturer thought the item was worth.
For example, if you buy a car for $25,000 with a loan at 7% interest
for five years, in the end, you will pay almost $30,000 for the car.
Once you factor in depreciation, you're left with a very cheap car that
cost you thousands more than it should have.
4. If you are in debt, stop spending money.Sometimes,
such as when purchasing a home, the cost of the item is so great that
you simply cannot afford to pay cash. This should be the exception
rather than the rule. When it cannot be avoided, you need to close your
purse and stop spending. Getting yourself further it debt doesn't help
your financial situation. Making a realistic budget
in this case is the key to success. Once you know how much you're
actually spending on those daily trips to the grocery store and coffee
shop, you'll be able to find room to cut costs realistically. (Keep reading about the benefits of budgets in Six Months To A Better Budget and The Beauty Of Budgeting.)
5. Don't count on somebody else to save you.In
times of economic uncertainty, people often think the government will
be able to help them, but unfortunately this is often the time when the
government has the least amount of money and freedom to help its own
citizens. In most cases, the government won't save you, so you'll have
to save yourself.
When the economy is in a downturn, you can't just look at what
you are spending, you also need to look at where the money is coming
from. Your employer is facing the same difficulties you are: trying to
make bill payments, balancing the flow of capital, all while sales are
slowing. Just like you, your employer will be looking to reduce its
costs, which could be in the form of layoffs. You could be in big
trouble if you haven't planned for this possibility.
The plan here is to start saving now for that eventual rainy day, and prepare an emergency fund
for yourself. If it is too late to start saving and you already need
the money, many financial institutions will let you defer a payment or
two if you prove you have a smart financial plan to eventually pull
through. (To keep reading about emergency funds, see Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?)
Live Now Like You Face Tough TimesThese
five strategies work equally well when times are good, so there is no
need to wait until you are in trouble to start making smart decisions.
Your lifestyle will be characterized by things you can actually
afford, such as a house that won't get repossessed, a car that might
not impress the neighbors but will still get you to work and back, and
long, restful nights free from financial worries. It might not be the
fairytale lifestyle of the rich and famous that corporate marketers
having been trying sell you, but at least you won't have to worry about
how to keep up on the payments for a lifestyle you can't afford.
If you're still struggling with how to make budgeting and credit work for you, check out our Budgeting 101 and Debt Management special features.
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