Do people at different levels of wealth spend their money on different things? Of course they do.
Some of these differences are by necessity, of course. If you have a million dollars in net worth, for example, then even average spending on your weekly meals will make up a much smaller portion of your net worth than the same spending would for somebody who has a net worth of $10,000.
(To put it another way: If you have two families that both spend $100 per week on food, but one family has a net worth of $1,000,000 and the other family has a net worth of $10,000, then the wealthier family spends less than one-tenth of one percent of its wealth each week on food while the poorer family spends one percent of its wealth.)
Yesterday I wrote about why it's important to prepare for an uncertain future. It's tough to predict where we'll be (and who we'll be) in five or ten years. It's even tougher to predict what's going to happen in the world around us. In order to cope with this uncertainty, it's important to be adaptable -- and to prepare for the worst (while expecting the best).
I was reminded of this advice again this morning as I read several articles in a row about the insane rise of Bitcoin and the current bull market in stocks, which is one of the longest in U.S. history.
Here's a graph of the rise of the S&P 500:
Here's a graph of the value of Bitcoin:
And, just for kicks, here's a graph of the U.S. unemployment rate (in this graph, lower numbers are better):
You can look at just about any economic indicator over the past decade and produce similar graphs. Despite what certain incessant whiners say, we've experienced a period of sustained wealth and prosperity. That's awesome!
If you've spent all (or most) of your adult life in this economy, you might believe it's always like this. You might believe the stock market always goes up, jobs are always easy to find, and every day is sunny.
But it doesn't work like that.
Since the Great Recession of 2008 and 2009, there have been a lot of news stories about how awful everything is. Never mind that most Americans enjoy the best standard of living of any culture in history, people still find things to complain about. Perhaps this is because people lack perspective. They don't realize what life was like in the past or what real hardship is.
Last week, I listened to an old episode of NPR's Planet Money podcast. In this 15-minute installment about "anti-stores", the hosts look at businesses like Price Club and Costco. What makes them different? How have they succeeded by re-writing the rules of retail?
"It used to be if you ran a store, you wanted to make it easy for your customers," the hosts say during the intro. "PriceClub and Costco went in the opposite direction. They made shopping harder." Yet, it worked. "Today, Costco alone sells more stuff every year than Amazon -- by far."
Last month, the December 2015 Consumer Confidence Index ®, showed improvement over the previous month:
“Consumer confidence improved in December, following a moderate decrease in November,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “As 2015 draws to a close, consumers' assessment of the current state of the economy remains positive, particularly their assessment of the job market. Looking ahead to 2016, consumers are expecting little change in both business conditions and the labor market. Expectations regarding their financial outlook are mixed, but the optimists continue to outweigh the pessimists.”
But just a couple weeks into the New Year, with the stock market still reeling, people may be more concerned about the economy. So now that we're smack dab in the middle of the first month of 2016, wherein we at Get Rich Slowly are concentrating on taking charge of our finances, I wonder how it's going for everyone. Do you have the same confidence?
(Since April is Financial Literacy Month, a number of articles will be devoted to more educational topics. This is Part IV in a four-part series about how understanding economic cycles could inform your financial decisions. Part I is Understanding economic cycles: An introduction. Part II is Recognizing economic seasons: recovery and growth. Part III is The fall and winter seasons of the economic cycle.)
In the first three parts of this series, you saw how the economy moves in cycles of seven to 10 years, and how each cycle can be broken down into four phases which correspond closely to the seasons of nature. We also looked at some of the telltale signs of economic activity that can help us recognize where we are in the cycle.
You may be thinking, "That's all interesting, but how can I apply that knowledge to my personal financial life?" Let's start by decapitating the elephant in the room -- market-timing. Market-timing is a fool's game. However, most of the time market-timing refers to trying to find the high point in the market to sell high. It is true: Nobody is able to tell when a market has reached its peak.
(This is Part III in a four-part series about how understanding economic cycles could inform your financial decisions. Part I is Understanding economic cycles: An introduction. Part II is Recognizing economic seasons: recovery and growth. Part IV is How to profit from economic cycles.)
You will recall from Part II of this short series about economic seasons that the spring of early recovery and the summer growth season resemble the corresponding seasons in nature fairly closely. In this post, we will look at the other two seasons of the economy: fall and winter.
But before we do, it is important to keep in mind that, though the seasons in nature change every three months, the seasons of an economic cycle do not have a fixed length. In terms of economic cycles, a season can last years; and it is difficult to set a calendar to know when the season changes.
As in nature, we have two change seasons (spring and fall) and two main seasons (summer and winter). Last time we looked at one of each. Here are the other two.
(Since April is Financial Literacy Month, a number of articles will be devoted to more educational topics. This is Part II in a four-part series about how understanding economic cycles could inform your financial decisions. Part I is Understanding economic cycles: An introduction. Part III is The fall and winter seasons of the economic cycle. Part IV is How to profit from economic cycles.)
In Part I of this series, the introductory post about economic cycles, we discussed the fact that the economy, while growing over the long term, moves in up-and-down cycles and that each cycle can be broken down into four phases that mirror the four seasons of nature. In this section, we will explore what we identified as the spring and summer seasons of the economic cycle by considering two fictional crop farmers (Farmer Fred and Farmer Claude) whose livelihoods depend on how well they manage their work each season.
Farmer Fred is a successful farmer; but his neighbor, Claude, less so. (We'll just call him Farmer Clod.) But let's dive into the seasons and see what each does that causes them to be successful or not. Nature programs always begin with the newness of spring, so why don't we start there?
(Since April is Financial Literacy Month, a number of articles will be devoted to more educational topics. This is Part I in a four-part series about how understanding economic cycles could inform your financial decisions. Part II is Recognizing economic seasons: recovery and growth. Part III is The fall and winter seasons of the economic cycle. Part IV is How to profit from economic cycles.)
Getting rich slowly is built on these four commonly understood pillars:
- Get out of debt (and stay out of debt)
- Find ways to earn more
- Spend less than you earn
- Invest the difference
Despite the fact that many people followed those four guiding principles during the Great Recession, some "got poor quickly" instead. I believe that is because there is something else to know about the economy and how it affects our finances. This post is the first in a short series explaining what I understand about the economy and its seasons.
If you have ever heard talk of Quantitative Easing (QE) and "tapering," you may have been left wondering what it is exactly. The terms are bandied about so frequently these days that it is rather difficult to parse out the facts from the political hype that surrounds every move the Federal Reserve Board, or Fed, makes.
Another, more pointed question to ask might be, "Does Quantitative Easing or tapering really even affect me?" And to answer that question you would need to know:
- What's behind the Fed's thinking
- How to interpret what the Fed says
- What a rate-hike means for the economy
- How to judge what the multitude of talking heads say whenever they report this stuff
When "Old Guy" made the comment that it might be a good idea to explain Quantitative Easing for the readers of Get Rich Slowly, I couldn't have agreed more. So this post is an attempt to explain not only what Quantitative Easing is, but also how it can affect each of us -- because, esoteric though it may sound, QE is something which affects us all.