As I mentioned last week, the US economy seems to be headed for the crapper, and it is very possible that much of the developed world will be dragged down with it. Many of you may be too young to have seen it before, but this sort of thing happens every now and then.
You may not be affected much; there are some people who do well even in very bad times. (The people who had jobs during the Great Depression were quite comfortable. There were very, very many people, though, who did not have jobs, and it was brutally hard for them, for many years. And when I say brutally hard, I mean like dumpster-diving behind department stores to scrounge discarded wrapping paper to use as toilet paper. Think of that when your life seems tough.) If your job is secure and your company is solid, or you are already wealthy, maybe you have nothing to worry about.
If the economy does get as bad as nearly every economist thinks it may, though, you could be in for some hard times. Probably not Great Depression bad, but bad enough. If you are already established in your career (and spending habits), you may suddenly find yourself struggling to maintain your lifestyle. If you are a college student about to graduate, you may find yourself stumbling right out of the gate, unable to find the sort of job you would like. As a student, you have an advantage over the thirty-something who was just laid off in that you’re used to not having any money. On the other hand, you’ve got all those student loans to pay back, and you were probably unwise enough to accumulate some credit card debt too. Good luck.
It has been a while for me, but all of my childhood and much of my adult life were spent in…financially adverse conditions. I don’t like it, but I’ve done it before and I can survive it again. Even better (for you, you lucky devil you), I can pass along some advice that may be helpful to you after your boss stops by your cube to drop an ominous, “Could you come into my office for a minute?” There’s nothing earth-shaking here, and any truly poor people reading this are probably going to be thinking, “Damn, these well-off people sure do whine a lot,” but I’ve seen first-hand how poorly many people respond when faced with a downturn in their financial status. Maybe this will help.
The important thing is to adjust your expenses to fit your new income. That may seem like common sense, but it is exactly what most people don’t do. If you take nothing else away, remember that. Everything else is details.
(You may not have much choice anyway; banks are tightening up and credit isn’t going to be as easy to come by as it used to be. Even if you (foolishly) want to keep spending and racking up debt, you may not be able to.)
If you were foresighted enough to have saved up an emergency fund, this is where it pays off. You’ll still want to manage your expenses carefully, to get the most out of it, but you don’t have to worry as much about losing your house or car, or putting food on the table, as someone who doesn’t have one. Congratulations. Just remember that you should only dip into the emergency fund to pay for essential expenses. If you use it to pay the cable bill or buy a new TV, you may find yourself unable to pay your mortgage down the road.
It wouldn’t hurt to periodically evaluate your finances even if you’re not having any financial difficulties. Do it the next time you have an hour or so free. You may be surprised at how much you’re paying for some things, possibly things you aren’t even using anymore. Sometimes just making a few changes can save you some money without cutting back at all on what you’re getting in return. For example, I recently made some changes to my phone, TV, and Internet services which are going to save me about $110 a month, but get me overall better service. That’s $1300 a year, just for spending about half-an-hour on the phone. A couple years ago I shopped around my home and auto insurance and ended up getting better coverage while cutting my bill by several hundred dollars. Don’t assume that the great deal you got years ago is still a great deal today. Shop around.
If you can do it painlessly, why not save the money now? Someday, in the not very distant future, you just might be glad you did.
The first thing you want to do when you find yourself with a sharply reduced (or non-existant) income is to take a hard look at all your expenses. The essentials are food, utilities, housing, transportation, and possibly certain debt payments. I include phone and Internet service (both very important these days if you want to get another job) in with utilities. Everything else is secondary. Make a list if you have to. Write down everything you spend money on in a given month and organize it into two columns: Essential and Not Essential.
Now, look at the non-essential stuff and see where you can cut back. Do you have to eat out five times a week? Do you really need the top-of-the-line cable package, with all the hi-def movie channels? Try eating out just once a week, and basic cable. Hit the liquor store instead of the bar and buy your booze by the bottle instead of by the drink. Maybe you can live on one new pair of shoes a month instead of five. You get the idea; cut out or cut back on the things you can do without. Don’t cry too much if you have to say goodbye to HBO; with any luck you’ll be able to get it back again in a few months or a year and if you missed anything good you can catch it in repeats or on DVD.
Every dollar you save by cutting back in the non-essential expenses is another dollar that you can spend on the stuff you have to spend money on. HBO you can live without. (Yes you can. Really. Be strong.) Groceries, not so much.
If money is so tight that you’re not sure you can even pay all of your essential bills every month, buy food first. Your money will go farther if you can cook — frozen dinners are handy, but a lot more expensive than making your own meals — but whatever; buy the food first. Screw the mortgage company and the phone company; you have to eat. If you don’t even have enough money for that, give serious thought to calling your parents and seeing if your old room is still available….
After you’ve stocked the ‘fridge and pantry, pay your utility bills. You have to have electricity to live (quite literally in some cases; here in north Texas a number of people die every summer because they don’t have air-conditioning) and you’re going to have a hell of a time finding a new job without a phone. The water bill, if you have one, is no place to cut corners. You may be able to save a little here, by downgrading your phone and Internet service, for example, or being more careful about wasting electricity, but in general don’t mess with the utilities. Pay them if you have any money at all left after groceries.
Only after you’ve put food on the table and kept the lights and water on should you worry about paying the mortgage (or rent). Yes, you have to have a place to live, but the thing is, it takes a long time for the bank or landlord to throw you out of your home. It won’t make anyone happy, but you can run a month or two behind and still survive. Lack of food and water is much less tolerable.
If you have a car payment, you’ll have to use your judgement as to whether it should be prioritized above or below your housing. That will depend on how essential a vehicle is in your area and how quick you think the bank will be to repo it if you fall behind. I usually ranked the car payment as more important than the rent. Putting gas in the car and fixing it if it breaks is more important than making a payment. If you need a car it’s not going to do you any good just sitting in the driveway looking pretty.
Credit card and other debt payments are last of all the essential expenses. Bad things may happen if you don’t pay them, but you probably won’t be deprived of a place to live. (If you owe money to the certain people, of course, you may lose more than your home. Or certain other people may provide you with a place to live, but one you probably won’t like.) Try to make at least the minimum payment on your credit cards, and as you watch the balance pile up resolve to get rid of those credit card balances forever once the money starts flowing again.
There is some slight of hand you can do with credit card debt, like opening a new card and taking advantage of their low-interest balance transfer option, and I’ve had to resort to that in the past, but you can only do so much of that. That is another reason to carry as little debt as possible.
I could go into a lot of detail on specifics of where to save money on this or that, and maybe I will sometime, but the important thing is to think in terms of trying to save money. The wrong mindset is what will do you long-term harm. Studies have shown that most people, faced with a financial setback like losing their job, don’t change their spending habits. They keep right on as before, but either draw from savings or go (deeper) into debt to make up the shortfall. (Same thing, really; drawing money out of savings is just another kind of debt; you’re borrowing from yourself.) Maybe you’ll have to do that even if you do cut back on your expenses, but wouldn’t you like to minimize that debt?
You could think, “This isn’t going to last forever; I can afford to run up the credit cards and pay them off after I get a new job.” Or you could think, “This isn’t going to last forever; I can live without the HD cable sports package for a while.” Guess which one is going to leave you with an empty bank account, and maybe a foreclosure notice from your bank?
Who knows; maybe you’ll find you enjoy cooking your own meals, and you might find some good books to read. The best things in life may not be free, but they can be cheap.