How to Thrive in the Coming Economy

With the trillion dollar government bailout for lenders that made bad investments, the roller coaster of the stock market, and the unknown future of the cost for fuel (although we're now paying under $1.80 a gallon,) it's hard for most people to have any idea of what to do financially. Expert economists don't know what the effects of all this will be on our personal finances, so what's a regular person to do? Here are some strategies that will work in any economy:

1. Get out of debt. A few observations -- the less debt you have, the more of your own cash you get to keep. The less debt, the more flexibility you have in what you do with your money. The less debt, the less risk you have if a financial catastrophe strikes -- you lose your job, you have a medical emergency, etc. PLUS if you've saved your money because you have less debt, you have cash to handle the emergency.

2. Earn as much as you can. This might sound like a no-brainer, but we get complacent when we think we are making "enough" money. You may have heard of Maslow's Hierarchy of Needs. These are usually classified as motivators, or pressures to fulfill a need. After a need is met, though, it is no longer considered a motivator. If you're making "enough" money, there's no real pressure to earn more. In the next few years there's probably a 99.9% chance that our income taxes will go up. Democrats control the government. (Regardless of Obama's "promises," Democrats can't change their nature.) Somehow the bailouts have to be paid for. And the Bush tax cuts expire in 2010 if they're not renewed...and see my previous comments about Democrats and their nature. Tax revenue is their money. You can't avoid paying income tax (legally,) but you can try to outearn its effects. Extra jobs, overtime, selling stuff -- extra cash will always be handy. Consult a tax adviser to see what you can do to minimize the amount of taxes you owe.

3. Shop wisely. In a down economy, bargains show up. If you have extra cash, the appetite to buy things can overwhelm you. Resist the urge to buy the first shiny thing that you see. Buy quality. Establish the items that you want the most, and look for the best bargains in those.

4. Buy guns. Related to #3, this point concerns buying items that increase in value, a personal finance variation on the "guns and butter" model in economics. Americans typically are consumers -- that is, they buy lots of "butter." Think of the items that you use once and then have to replace. Those who purchase items that will increase in value -- "guns" -- also increase their net worth, their wealth. One thing about income taxes - they only tax your income, not your wealth. As Andrew Tobias wrote, "A penny saved is worth two pennies earned." Take advantage of financial situations, and use the opportunity to increase your non-taxable wealth. When the dust settles, you want to be in a better position financially than you were before.

Notice that I didn't say anything about investing. If the experts don't know whether to invest in stocks, bonds, real estate or, say, subprime mortgages, then I surely don't know. But if you follow the advice above, you'll be ahead of 99% of Americans.

Financial Illiteracy

Listening to radio host Dave Ramsey discuss a recent story in USA Today about how Americans are depending more and more on their credit cards to get by....

Ramsey said that his organization's experience as financial counselors suggests that many people pay their credit card payments and car payments before they pay their mortgage. Could it be that we don't have a "mortgage crisis" but instead have a "credit card crisis?"

I won't go into the math involved, or the collection techniques used by credit card or auto loan companies. Instead, right now I'm thinking about how people get into that kind of mental state in the first place.

Lord knows I've made more than my share of financial mistakes, and will probably make more in the future, so I'm no expert. But shouldn't some of the efforts of the teachers' unions and educational groups go toward teaching our children the basics of personal finance?

I'm not sure what the curriculum would include. Budgeting basics, to be sure. Balancing a checkbook. An explanation of compound interest -- should it take thirty-five years to pay off a credit card? How to comparison shop.

But those are mechanical things, subjects that can be taught like any other in school. I think there needs to be a teaching of a new philosophy, at least new to the current generation -- the principle of delayed gratification. We have been taught since the advent of television that we must have the next thing, the newest trinket, the shiniest object that catches our attention, and we must have it now.

Our grandparents knew about this. The generation that lived through the Great Depression understood what it meant to do without -- our current "poverty level" is the equivalent of what was once considered well-to-do. You saved up to pay cash for a car. You couldn't afford a house until you had a substantial down payment, usually well into middle age. You ate meals at home, and a burger and coke was considered a very special treat.

That mindset created the Greatest Generation. America prospered throughout the 50's and 60's, because of the understanding of adults that nothing is free, you have to work hard for what you get, and sometimes you have to just do without.



We don't have a financial crisis in America. We have an appetite crisis, one in which we want everything we see, and we believe that it's our right to have it all.

Education should start early, fifth or sixth grade at the latest. By the time our children graduate high school, responsible personal finance should be as programmed in their minds as reading and arithmetic.

Of course, if an entire generation of Americans became financially responsible, the Democrat party would wither and die.