I’ve posted several stories about national economic woe recently. In real life, I’ve had conversations with a few of my friends about the mortgage mess, about recession and a possible bear market, and about the nature of poverty. The economy is sour in the United States (and elsewhere in the world), and this frightens many people.
I don’t buy in to the forecasts of economic doom. I’m an optimist. Things may get rough, but they’ve been rough before. Besides, I believe that I have more control over my financial future than the general economy does. If I make smart financial choices, I can weather the storm.
Whatever happens, I’m going to pursue the get rich slowly philosophy. It’s worked for me so far, and I’m confident that it will work in the future (whatever that may bring). I will:
- Avoid debt.
- Spend less than I earn.
- Maintain an emergency fund.
- Track my spending.
- Exercise frugality.
- Save for my retirement.
- Ignore the media hype.
It almost sounds like a boy scout pledge, but I don’t care. As I’ve developed these skills, my financial life has turned around. These behaviors helped me to eliminate debt, and now they’re helping me to build wealth. And all of these are things that I can do to control my money, regardless of whether we’re in a recession or an economic expansion.
When the economy is good — especially your personal economy — it’s easy to slip into bad habits because there’s a greater margin for error. Tough times require getting “back to the basics”. If you believe we’re headed for a recession, don’t panic. Stay calm. If you take control of your finances and make smart choices, you’ll probably be fine.
Addendum: Trent at The Simple Dollar published a related piece today: Is Success a Choice?
This article is about Basics, Economics, Odds and Ends
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For me, back to the basics includes an emergency food supply to last several months. This could be a huge help financially in times of lost income, food shortages, or temporary emergencies. I suggest that everyone include a decent-sized food stash as part of your non-monetary emergency fund.
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These are things we should be doing in good times as well as bad. It is nice that everyone (outside the pf world) is now jumping onto these basics, but nothing really has changed in my money strategy.
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The economy is bad, I have a friend who lost two houses to foreclosure, but another friend of mine whose husband paid off their house in 5 years. Some people will not be affected by the storm, while others will suffer. We need to prepare ourselves in good times as well as in bad times.
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Great advice! As long as we do stick to the basics, we’ll always stay financially responsible. It’s in this time of a recession when emergency funds are absolutely vital and people should be saving as much as possible in case the going gets much worse.
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The human mind has a tendency to extrapolate linearly when it predicts the future.
For example:
Real estate is going up tremendously, it will never go down!
or
The dollar is going down in value and stocks are taking a huge hit. We’re dooooooooooooomeeeeed. We shall never recover!
Usually the truth is somewhere in between. Of course everyone’s going to read this, agree, and then say, “but this is the time we’re REALLY dooomed.”
Such is human nature.
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I agree with you. As messy as the economy is now, America has lived through worse. I would even take it one step further and say this is the best time to invest for long term investors.
Fortune are made in times of adversity with things are less dangerous now because we are not facing an impending top
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I agree with you. No matter how the economy situation out there is like, commitment to frugality and savings is essential. As long as you spend less than you earn, I don’t see how one can go wrong. As usual, great article!
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Times are tough, and getting tougher, it’s true. As a result of the recession (there! I said it!) we’re seeing a return to simplicity and frugality, perhaps a la the 1930′s. But really, we got here through too much excess in the first place: too many HE loans, too many SUV purchases without the funds to back them up, too much credit card debt.
I’ll be the first to admit I lived beyond my means, for about 20 years. Now I’m repaying my debt, trying to save, and attempting to budget every last penny (while still enjoying my life). I plan to continue my frugal ways after the economy picks up (as we know it will, eventually). I hope to learn valuable lessons from the belt tightening I’m doing now; reading articles like yours just helps keep me motivated!
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You shouldn’t be “confident” that these actions will get you through the future. Past performance does not guarantee future results. You are doing what you can right now and that is commendable. On the other hand, the best way to prepare for the tough times is to imagine some of them. Here are some good questions:
What would you do if you or your spouse lost your job tomorrow?
What would you do if you, your spouse, or kids got seriously ill tomorrow?
What would you do if your car engine blew out tomorrow?
When answering these think exactly what you would do, how would you get to work, how would you make this month’s mortgage payment, who would you ask for help, what kind of help would you need, etc.
Some people may think I am gloomy, but its comforting to me. A few years ago I was in a situation where there was a good chance I would get laid off. I thought through exactly what I would do, and found that all-in-all things weren’t so bad. I could live for six months without any major changes to my life, and close to a year if I cut back seriously. I would almost certainly be able to get a comparable job within a year, so I wasn’t so scared after all.
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Sounds almost exactly like my plan
I’ll be fine also. In fact, we just took an $800 a month hit to our income this month which will last at least until summer. The good news is, three days before we got this news we paid off our last nonmortgage debt, so we can still smile.
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It’s no mystery why the economy is tanking: it’s because too many people ditched sound money management and went for the quick buck. And I’m talking people from all walks of life from the investment banker on down to the CA strawberry picker who got a subrime loan to buy a $750K house. Is it any surprise that the economy is now swirling the bowl? It was like a financial perpetual-motion machine: the laws of physics eventually catch up with you.
Yes, this recession is likely going to be deep and long – let’s hope that it lasts long enough so that people learn their lesson. Recessions are not bad in themselves, they’re a necessary part of the economic cycle. The government and the Fed make things worse by trying to ‘soften’ or delay recessions. Now we’re getting what’s due – time to pay the credit card bills.
Those of us who are savers and who are out of debt will not feel this as badly as most other people, but we’re still going to be effected.
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The points are very simple but they make perfect sense, thanks for re-iterating them.
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Carrying no current debt (other than a mortgage) is what makes me feel really secure. That mixed with a substantial emergency fund, should help just about anyone weather this storm. If I lost my job we would definitely have to cut back, but if I absolutely had to I could go work at Lowe’s or Home Depot because of where our finances are right now. It’s a great feeling.
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Having a pretty big emergency fund is really a great peace of mind when trying to weather a recession or slow down of the economy.
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As Sjean said above, we should be practicing these basics at all times regardless of the economic situation. Basics are not just for beginners and back burners.
Even if we’re still 40 years from retirement age, we have to start thinking about the possibility that our retirement funds might not be enough. What if you’re lucky enough to live another 40 years after retirement?
Of course we have to enjoy life while we’re young, but everything should be in moderation and never at an expense to our future well-being.
“Spend less than you earn” is a vital one, but I constantly wonder if/when the cost of essentials like food, gas, utilities, etc. will surpass what we earn. I shop for groceries once a month, and each month the prices are significantly higher than the last.
I try to be optimistic too, but even living frugally and cutting back where we shouldn’t really be cutting back might not be enough for long.
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the great part of your philosophy is this: if inflation gets out of control and interest rates climb, having minimal debit minimizes the impact of the high interest… and you`ll have the skills to cut back on non essentials to compensate for the inflated costs of goods. This is truly wise!
I find your site very inspiring!!!! Thank You!
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I forecast selective economic doom.
Unskilled workers will face a very ugly financial future.
They will be squeezed by high costs for health care, energy and housing. Finding affordable housing will require long commutes to work, which will drive energy costs out of reach.
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I agree with Minimum Wage, we are in for a ugly financial future. The dropping dollar will push the price of imports to new highs. We are going to see high Inflation over the next few years. Unskilled workers will face an uphill financial outlook.
The middle class could get wiped out.
http://www.pennyjobs.com/pp/public/Articles.aspx?aid=30
Just look at what the Fed is doing, cutting the interest rates by 2.25% within 2-months and buying mortgage backed securities. Some of the Fed’s actions have not been used since the Great Depression.
Being stingy and paying off debt will help, but most people are still living in la-la land – thinking that the economy will return to its bubble-state by the end of the year. They are planning their next vacation and their next SUV purchase. But when the stock market sinks, we will be facing a Japan style recession with both the housing and stock markets declining together.
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When the economy starts to slow down and things look grim there is a lot more opportunity for a savvy investor. But with that said getting back to basics is key… what’s even more important is actually knowing what those basics are. Unfortunately for a lot of people the basics include living off credit cards.
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I’ve turned off the TV for a while. Also stopped reading online media. The constant verbal pounding isn’t going to help anyone. We all know it’s bad. Now tell us what to do and how to get out of it and prepare that this never happens again.
Yeah, right. It happens every six years or so. Think 2000-2001 dot com disaster, junk bonds, Savings & Loan, Enron, ’87 crash. It goes on and on and on. Nothing has been done to get us off of oil. Cars (american and imports) really aren’t as fuel efficient here as they are abroad. Why is that?
My parents survived the Great Depression. What they learned from that episode is what we all should be doing. No credit. No debt. Live within your means. There is no quick track to riches. Until people learn those simple things, I am sorry to say, we will be doomed forever and ever and constantly repeat the mistakes.
And you don’t invest in Wall St. They are just too corrupt. They have very little regulation.
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I’m not too worried about myself- we have the basics covered and are on solid ground due to the choices we have made.
These are the people I am worried about:
http://money.cnn.com/galleries/2008/news/0803/gallery.real_stories/
I read a good article on the Harper’s web site that speculated that the only way out of this recession is the creation of another bubble. They predicted that it would be in alternative energy sources, and I do think that they may be right!
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I think we’re definitely in a pickle, as far as the US economy goes, but it can be helped significantly by the tips listed above.
Recipes that make use of dried beans are another good idea. My favorite is:
1/3 cup dried lentils (cooked)
1 can of diced tomatoes (14.5 oz0
salt and pepper (generous)
1/2 a small onion
Cook this, covered with foil at 350 degrees for 30 minutes. Remove and add two chopped carrots. Cook another 30 minutes covered. Remove again and top with 1/2 to 3/4 a cup of shredded cheddar cheese. Heat another five minutes and serve.
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Great simple post. I think it’s best to re-enforce the second notion of “spending less than you earn”. Ideally, individuals should be executing this process in any economic time. But, this is especially important during recessions when lenders are more strict.
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The GRS philosophy is all about embracing the back-to-the-basics approach and maintaining a sound defensive position at all times. FACT: there will always be an ebb and flow in the economy. History and economics 101 teaches us that. Should we not place value in the lessons of the past? The advice provided within this insightful and practical blog should enlighten most individuals to the best practices of personal finance. JD is to personal finance what Mr. Miyagi is to martial arts. Listen and learn.
Consider this:
Seriously, in all cases, you use your best judgment to deal with the problem on hand. Hopefully, sage advice played a role in it. Peace.
If I’m standing outside and dark clouds are slowly drifting in my direction, was it better than I wore my trench coat that day or that my portable umbrella is on hand or that I should find cover – just in case? Answer: Whatever keeps you drier
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A tangential comment, but you mentioned the Boyscouts, and there isn’t a pledge. There is, however, a similar “Scout Law”.
A Scout is:
Trustworthy
Loyal
Helpful
Friendly
Courteous
Kind
Obedient
Cheerful
Thrifty
Brave
Clean
Reverent
Some of those are pertinent, and some fell out of style with me around the same time that I started thinking for myself. Still, thrifty stands out among them as a non-traditional value for the modern era.
-Nick
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Good steps for all times. Because no matter what happens with the overall economy, it’s MY economy that matters. The overall economy could be great, but if I get laid off or sick or disabled or some other devastating event, my personal economy is in a crisis. The overall economy could be sucky, but if I keep plugging along, then everything could work out just fine.
The last point, ignore media hype, is a key to effective investor behavior, emotions, and results, too. Placid cow investors, steady plodding. Stay in it to win it. Keep buying, there’s a sale on!
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That is funny. It is like a boyscout oath. Ideally you should spendless than you make and save for retirement, but people find that there are big investments that make it difficult, IE purchasing a house, spending for your child or saving for their education, even purchasing a car. However if you live by these simple rules I think you should still be able to live well during retirement.
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I agree whole-heartedly with these points and believe that by living basically it is possibly to live below your means and save money, even in the current market. I am enjoying reading your blog and find many of the ideas practical and very realistic.
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To those whose comments involve what should have been as opposed to what is: that’s not helping.
Shouldn’t we, as individuals, have gotten ourselves in massive debt? Duh. I, for one, am in massive debt. I worry about my job every day…it’s in the hotel industry and I feel they’re out for blood. It makes me sick at night.
Coulda, shoulda, woulda.
What do I do now to stay afloat?
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