Despite a weak first quarter, the economy is still doing pretty well. The jobs picture is looking good, meager pay raises are being scratched out by working class Americans and most people who want to work are able to find jobs.
It is during this time of relative prosperity that it makes the most sense to both anticipate and prepare for the more difficult times that lie ahead. How can I be so confident that hard times will strike again? Because they always have as surely as night follows day. What follows are hard-learned lessons about what’s necessary to get your finances in shape to survive the next economic apocalypse.
Living Below Your Means Is Harder Than It Sounds
Hard financial lesson number one is living below your means and it’s harder than you might imagine. Living below your means is key to having enough money to save and maybe a little left over to invest. But your lifestyle has a natural tendency to expand into your available income and most people don’t make the hard choices until they hit a hard wall. Even then there are ways to cheat the budget limitations, with many pushing the spending wall with revolving debt. Using debt to maintain your everyday lifestyle shifts it from a financial mistake to a financial disaster in the making.
Don’t Starve Yourself, Either
The equal and opposite mistake is not allowing yourself any extra spending or indulgences. Life doesn’t wait until you reach financial freedom before the clock starts ticking. Saving money and having a bountiful life are not mutually exclusive, it just takes a bit of planning to keep it all in balance. The concept of “value” doesn’t necessarily mean “cheap” when it comes to expenses. Rarely is the best value the lowest cost. There should be a few indulgences and the things you save up for to buy should be good quality and provide a long service life. The percentages that you spend, save and invest should be fixed and, when you save a little money here and there, splurge. Once you have an emergency fund, set aside part of your savings for fun stuff. As long as it’s paid for and you’re not dipping into your emergency fund, have at it.
You Don’t Actually Need Credit Cards
I realize this one may be a bit controversial but also keep in mind that much of the credit card advice you get in public forums may be from paid shills working for the banking industry. We get by completely comfortably in the world by setting up a special Visa branded debit card and using it like a pre-paid credit card. We fly, rent cars, stay in hotels and do all the things people use credit cards for and never miss them. By carefully monitoring our debit card charges we’ve never been saddled paying for a fraudulent charge. We’ve also successfully disputed charges through Visa for products and services for which we were unhappy. The horror stories of charge blocks and liability for fraudulent charges never materialized, even when my wife had her card number skimmed at a local gas station.
Credit card debt is the absolute most crippling debt you can carry. Interest rates are obscene and banks know every way in the book to chisel their customers. Using credit cards for reward points is a sucker’s game.
Saving Should Be Automatic
Savings should come out of your check before it ever lands in your spending account. Too many try to make savings what’s leftover at the end of the month but, if you try that, you’ll discover there’s never anything left at the end of the month, a fact that is reflected in broader economic trends as well. When consumer incomes go up, consumer spending goes up. For most people, another dollar in their pocket is another dollar they spend. Becoming financially free means breaking that cycle and feeding your savings with a fixed amount out of every paycheck.
It’s the establishment of habits, like automatic savings, that will enable living below your means as everything else in life has to fit into the percentage of your income that you spend. Start that habit early and you’ll avoid the necessity to dig yourself out of a massive debt hole.
Good times in the economy tend to be of a short duration, so use this time wisely and bank ahead for the lean times.