This is a guest post by one of my favorite personal finance bloggers, Frugal Zeitgeist. She spoke with us earlier about her obsession with paying off her mortgage. (If you missed it, here’s Part 1 and Part 2). What does Frugal Zeitgeist think of our current economic events? I asked, and she gave us some thoughtful pointers on facing your fears during a financial storm.
The subprime tsunami finally hit home over the past couple of weeks, and September has been a painful month: 159,000 jobs lost in September alone contributed to an overall unemployment rate of 6.1%. Even more disconcertingly, CNN states that the number of underemployed people (which includes people struggling to get by on smaller salaries than they once had as well as those who have dropped out of the job market altogether) is at its highest rate in fourteen years.
These are scary times, to be sure. For me, the fear factor is compounded by the collapse of historic financial institutions and the government’s struggle to patch together a bailout plan that no one can be sure will really work.
Fears about things we can’t control aren’t stupid, but if you let them form the foundation of your financial decision-making, you’re not doing yourself any good. Instead, it makes more sense to master your fears by facing them head-on. In the middle of a financial crisis, that means looking hard and realistically at your total financial picture and getting things in order. Here are a few places to start getting back to basics:
1. Don’t make any drastic changes based on fear alone
Investing requires putting together a sound asset allocation strategy based on your goals, your comfort level with risk, and your time horizon before retirement. If your asset allocation strategy worked for you before the crisis, then don’t change it. All you’ll do is lock in your losses for the short term and raise the risk of missing out on the recovery when it comes. . . and yes, eventually the economy will recover.
But what if my asset allocation strategy isn’t working for me?
If your asset allocation strategy is out of whack with where it should be (for example, if you’re fully invested in stocks and only a few years from retirement), then you need to make some changes. You may want to take a loss and move into safer investments, but you should plan on balancing out your losses another way. For some people, that might mean taking on a second job in your spare time, or even postponing retirement for a few years.
2. Pay down debt
If you have credit card debt, this is the time to get rid of it. With the credit crunch in full swing, you can expect higher interest rates, lower credit limits, or both; many people are already feeling the pinch. Even without the crisis, there is no consumer bargain that’s so good that it makes sense to pay for it over months or years. The aggregate cost of doing so is simply astronomical.
Cutting debt off at the knees means belt-tightening. For some people, it’ll mean a whole heck of a lot, which leads to . . .
3. Rein in your spending
Paying off debt means not only getting rid of what debt you have, but also making sure that you don’t incur any new debt. This means understanding the difference between wants and needs, and structuring your behavior accordingly. In some cases, that means putting off major purchases and socking the money away in savings. You can also take it as step further by assessing your needs and figuring out creative ways to cut the costs. Some easy substitutes include:
–Don’t buy water: take a reusable water bottle with you and fill it with refrigerated tap water. (Bonus: tap water contains fluoride, so it’s better for your teeth anyway!)
–Don’t buy breakfast or lunch: brown-bag it. If you have access to a microwave at work, a really cheap and healthy breakfast is as easy as nuking quick oats for ninety seconds and adding fruit or a dab of honey or peanut butter.
–Don’t toss your holey socks. Darning takes minutes, and unless you take your shoes off in public, no one will ever know.
–Not all professional attire needs to be dry-cleaned. Ironing your own shirts takes a little practice, but once you get the hang of it you can do a week’s worth of shirts in half an hour. Over time, it’ll save you a bundle.
A good mantra that helps me is a saying from the Great Depression: Use it up, wear it out, make it do, or do without.
4. Build up your emergency fund
Most conventional wisdom I’ve heard has said that everyone should have six months’ worth of expenses stored up. In this fiscal environment, I think it would be more prudent to save up a year’s worth. That doesn’t mean that people should stop investing, but paying off consumer debt and kicking up the emergency fund take precedence.
5. Keep your income stream going
If you have a job, do everything you can to keep it, but hedge your bets: keep on the lookout for new opportunties just in case the hammer falls. Networking with your colleagues, friends, and professional organizations is one of the most powerful tools that exists for getting a job or upgrading to a better one. If you’re unemployed, spend as much time as you possibly can looking for a job and networking, but be realistic: if you need to take lower-level temporary work to keep going, don’t let your pride get in the way. If you play your cards right, it could open up opportunities for a completely new career path.
6. Give
No matter how bad you have it, there’s a good chance that someone else is worse off. Helping can take many forms, from making sure that an elderly person has enough to eat to spending a weekend helping out at a food pantry. In tough times, sharing what you have matters more than ever.
Avoiding your fears usually means postponing a reckoning until things are far worse than they could have been, so this is the time to cowboy up and take action. If you want to take care of your future, you must take care of your present.
Thanks, Frugal Zeitgeist! These are excellent tips. Be sure to find more great tips and discussion at Frugal’s personal finance blog.
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