Thoughts.com Blogs - The recession and "spending" diets

I don't know about anyone else, but I'm a little disturbed at what's happening with the economy right now. As it was a stormy weekend in the northeast, we probably watched more TV than usual. We happened to catch the nightly news all 3 evenings this weekend. I don't think I've ever heard such bad news all at once.

The first thing we heard was about the housing crisis. People can't afford their homes and they are getting forclosed at a record pace. The result of this (besides the obvious) is that banks are losing money, so they're jacking up interest rates on credit cards. What are the 2 biggest debt-eaters for most people? Credit card debt and mortgage payments.

The second thing that we heard about was how Student Loan vendors are going broke. Why? Because students can't afford to pay back their loans when they graduate, therefore there is no money going back into the system to replenish the funds. Who does this impact the most? The middle class. If you are a low-income family, you usually qualify for grant money. If you're weathly, it's a non-issue altogether. That leaves those of us who are in the middle.

Lastly, we can't not discuss the price of gas. Here in CNY, we're paying about $3.35/gal. That's about 20 cents above the national average because we live in one of the highest taxed states in the country. I would say that for most of us, the see the biggest impact in the grocery stores. We're also seeing it with the rising costs of meat and flour because feed costs more for farmers; and farmers are growing more corn than wheat to meet the demand of ethenol.

I've said it before and I'll say it again: when is this insanity that has taken over the people of this country going to end? How long can you get away with living on credit before it comes back to bite you in the behind? I'm thinking that way too many people are finding this out the hard way. And the effects don't stop with grown adults who should know better: they're sending their kids off to college and these kids are being brought up in the "credit" world. Now it's even catching up with them and they probably aren't even self-sufficient yet.

So what are some things you can do to deal with the economy in which we find ourselves living in?
I have some thoughts to share. These are some of the things that my husband and I are doing.

Before I begin, I need to preface this with the fact that we have mostly been very smart with our money. I can't tell you we've been perfect and that we haven't made mistakes along the way, but luckily for us they were SMALL things that could be fixed easily. We have always lived within our means and avoided big credit card debt. Any credit card debt we've had, we've paid off within a year's time. In fact, by the time we built our home 7 years ago, we had NO DEBT. Not even a car payment. That's because we were in a "saving" mode, as opposed to a "spending" mode. I do believe these modes exist. It's a mentality that you live in when dealing with your money. The scary thing is that most people live in a "spending" mode most of the time. I think one way to recession-proof your finances is to switch from a "spending" mode to a "saving" mode.

Here are the things that we're doing in our house to deal with our economy today:

1) The credit cards are being put "on hold". In our minds, they do not exist. We pretend they aren't even there. We do have some credit card debt from our vacation, but that's all that's on there. There are no clothes, no hobbies, and no impulse purchases on there. We will be putting any extra money we have onto that balance and will have it back to zero by May. First goal: BACK TO ZERO.

The single most important thing you can do to deal with the recession: PAY OFF YOUR DEBT. Pay as much of it as you can and do NOT charge anything else. If you don't have the money, DON'T BUY IT. Put off all unnecessary spending until the debt is gone. Use the "snowball" effect if you have more than one credit card/loan bill. Once one is paid off, apply that money you were using to pay down something else.

2) Trim all unnecessary spending anyplace else in your budget that you can. Do you even watch the movie channels on cable? Is it absolutely necessary to have high-speed internet, or can you do a temporary downgrade to dial-up? (Yes, I know it sucks but it's only short-term). Do you have a gym membership or other membership that isn't being used? Cancel it. Do you have magazine subscriptions you don't read? Do you belong to a book club or any other club that costs money? This is the time to trim your budget down so that you have more money to pay off debt.

3) Get yourselves on a budget plan for fuel oil or natural gas; and electricity. (For those who heat with oil). Fuel oil is up to $3.39/gallon and rising. Electricity costs are on the up, too. Most plans have you paying one amount for the year. We have done this for 10+ years now. There are no surprises for these things. We know how much to plan on for these things in our budget. It gets re-evaluated every year and adjusted as necessary. Yes, it usually goes up, but not a lot. This year our electric jumped $18/month. But we expect our fuel to stay the same because we installed a wood stove last year. Do what you can to keep your budget amounts consistent month to month.

4) Oh yea. If you don't have a budget, you really should get one. Sit down and figure out how much money you pay for each thing per month and stick to it. Track your spending for a month if you have to. I'm sure that if you do this, you'll find you spend a lot of money on things you didn't even realize. The daily trips through the coffee place or for drive-thru food adds up quickly. Pack your lunch and bring your own coffee to work. Those little things add up to a lot over time.

5) Avoid the stores as much as possible and condense your trips to save on gas. This was one of the reasons I started grocery shopping monthly as opposed to weekly. If I'm not in the stores, I can't spend money on impulse. I go with my list and buy what I need. I'm not saying that I don't occasionally forget something that I have to throw in the cart at the store. I'm talking about the cute little "do-dads" that you see that you think you need or want. Keep your kids at home (or your husbands-they can be just as bad!) and don't go hungry. Make a menu plan (weekly, bi-weekly, or monthly-whatever works for you), make a list, and go it alone. While you're out, hit the bank, post office, office supply store, and gas station. Run as many errands as you can while you're already out. It may be a long day, but it'll save you running out later in the week and it'll cut down on gas.

6) If and when your budget allows, set yourselves up with a separate "spending account" for extras. Some people call this a Freedom Account, some call it your Contingency Fund. Call it whatever you like, but this account is for bills or spending that isn't a part of your regular budget. This account is for car repairs, home repairs, gifts, vet bills, clothing, school supplies, or bulk purchases. What you put in there will depend on what it'll be in there for and where your needs are. For us, our insurance premiums are spread out over a 12-month period. Our life insurance comes out automatically, and our taxes are in ESCROW. Therefore, we don't need to plan for those. We basically just have accounts for what I mentioned above. This is your "insurance" policy for avoiding having to use your credit cards. That way, if you find your car suddenly needs new brakes, the money is there to pay for it. You'll have no need to use your card.

7) Lastly, get saving for retirement and an emergency fund. We don't live in the day and age where we can bank on social security to take care of us. You need to have a plan, and a diversified one at that. Don't put all your eggs into one basket. Make sure your savings are diversified. With the stock market being so volitile right now, it would be smart to put at least part, if not more, into other safer accounts. An emergency fund is money you can fall back on in case of job loss or major health issues. Some people suggest having enough for 3-6 month's worth of bills. Again, that's a personal call. No matter what the amount you decide on, put whatever you can into it.

8) If you've been fortunate enough to have these things in place, and your finances allow, another smart thing to do is to open up a Christmas savings and Vacation Savings account. We've had a Christmas savings now for 3 years, and I honestly don't know why we didn't do it before. I put in a certain amount every week when hubby gets paid. By the time the holidays roll around, (or before if I happen to get the urge to Christmas shop in July-which never happens) we have what we need for Christmas, and we don't have to use credit cards. The money is already there. I will be opening a Vacation Savings account in late spring to start saving for our next family vacation. I will approach this the same way I do the Christmas account. My goal is to not have to use my card AT ALL the next time.

There are lots of other little things you can do to deal with our lagging economy. I'm hoping that our next president puts us into a "savings" mode and figures out a way out of this mess we are currently in.

Too many people are robbing Peter to pay Paul these days. It would be wise take over control of our money as opposed to letting our money control us. Pay down debt, trim unecessary spending, and start saving. Those are the best things we can do.