Everywhere I turn, I see tales of financial doom and gloom. The stock market is crashing! The dollar is inflating! Oil is peaking and homes are foreclosing! If you listen to the breathless media, it’s 2008 all over again.
Maybe it is, and maybe it isn’t. I don’t know. What I do know is that I’ve learned from past meltdowns, and this time I’m ready for almost anything. (I say almost anything because in the unlikely event of hyperinflation, I’m as screwed as everybody else.) This time, I’m prepared so that whatever happens to the national economy, my personal economy is on solid footing.
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- First, I have emergency savings. When the market tanked in 2008, that wasn’t the case. I was newly out of debt, and my savings were minimal. My lack of savings made me nervous. Today, I have enough saved to cover a year of expenses.
- Second, my expenses are low. I’ve worked hard to cut my monthly spending to the minimum. As a result, my income is more than enough for my needs. I’d have to lose a lot of income to begin feeling pinched.
- Speaking of which, as a writer I have multiple sources of income. This diversity gives me flexibility and insurance. If I need more money, I can seek other jobs. If one of my jobs goes away, the drop in income will hurt, but it won’t be the same as being wholly unemployed.
- Lastly, I no longer sweat about my investments. In 2008, I was still trying to time the market, to make trades based on the rise and fall of individual stock prices. I don’t do that anymore. Now I make regular investments into index funds, and I ignore the financial news. I’m much less stressed about my investments than I used to be.
I’m not trying to gloat. My aim is to help others find a little sanity in the midst of all the madness by promoting the power of a sound personal economy.
Regardless the state of the national economy, ultimately you are responsible for your personal economy. When times are flush, you need to set something aside for the future. Then, when things turn dark and dismal, you’ll be better shielded from the slings and arrows of outrageous fortune. A strong personal economy is built on personal-finance fundamentals such as these:
- Clear financial goals. You need to know why you’re earning and saving money. Where do you want to be in five years? Ten? How do you want to get there?
- An adequate emergency fund. Experts disagree on how big an emergency fund should be. Some say six months, some say 12, and others say three. I say it should be big enough to let you sleep at night when the economy gets rocky. (And the best time to save is before you need the money.)
- Limited use of debt. If you use debt, use it wisely. A mortgage isn’t a bad thing, and neither are student loans. A car loan is borderline, though, and borrowing to buy a television is foolish. Use debt only when needed. If you suspect you may lose your job or encounter some other big life change, then get rid of debt completely.
- The practice of thrift. When your personal economy is good, it’s easy to get lulled into complacency. You start buying organic ketchup and eating in fancy restaurants. You take bigger vacations. But if you can master the art of frugality when times are fat, you’ll be better able to practice it when times are lean.
- Smart investing for the future. Lastly, invest wisely. Don’t let the news lead you to make emotional decisions. Too many people sold their stocks and mutual funds at the bottom of the market in 2009, and then waited until prices had risen before buying back. Don’t be like that. Buy low and sell high. If you weren’t willing to sell your investments when the Dow was near 13,000, then how in the world does it make sense to sell them when the Dow is below 11,000?
When you pay too much attention to national or international economic news, you can find yourself making decisions that don’t make sense for your personal economy. Five years ago when the housing bubble was in full swing and credit was flowing freely, many people bought into the idea that quick profits could be made from real estate. Now many — including my own brother — have faced foreclosure. That media-fueled frenzy has turned into media-fueled despair. If you didn’t give in before, don’t give in now.