A lot of people are talking about recovery–you can feel the buzz in the air, and the excitement of many of us who have felt the pressure of the economy take a direct hit on our ability to earn an income and maintain a basic lifestyle.
However, and it’s a big however, research and consensus around the web and major money magazines seems to indicate that we have a very short memory. So short, in fact, that our national savings rates and other major spending/savings indicators correlate exactly to the economic conditions of our time.
In other words, when the economy is tight, we spend less and save a lot. When it gets better, we tend to spend more and save less.
I was speaking to a fellow blogger a few days ago, who remarked that he “doesn’t buy into the economy.” In other words, he believes that doing the right things on a personal level should be our primary concern.
I agree to a certain extent–reacting to the news of the day, especially for long-term decisions like investments, is financial suicide.
But I do believe we need to be reactive to a certain extent. As our circumstances change for the worse, we may need to contract our budget more than expected. When they get better, we may need more help being diligent with savings when everyone around us is going on shopping sprees.
To that extent, and being very mindful of our natural, “wired-in” tendencies to go with the economic flow, I have several suggestions for how to keep your “recession” state of financial mind as we come out of this mess (whenever that may be).
Why Would I Want to Be Stuck Here?
By now you might be thinking–all right, Wojciech, I see what you’re saying, but why in the world would I want to be “stuck” in a recession mindset? Haven’t we endured this long enough?
I agree–going through a recession is anything but pleasant. But let’s take a look at some of the financial habits we’ve developed as a result:
- As a country, we’ve saving more than we have in a long, long time.
- Frugality has become the buzz word of the year, as more and more people discover that value is more important that price.
- We’ve simplified, contracted, and streamlined our financial processes, businesses, and spending habits.
- Lending practices, although they have over-contracted for now, will be more reasonable for the foreseeable future.
So while a recession may not be the best things in terms of pure economic sense, it’s a great cleansing and reset mechanism for our money.
Understanding our run-away tendencies to over-correct in an upturn, here are some of the things we will be doing in the coming months to prepare:
- Automate as much as possible. When we remove emotional decision-making from our financial life, we can reduce or eliminate decisions that hurt our long-term success with money. Consider your current situation and determine what you can automate–retirement contributions and savings are two that come to mind immediately, but you can also play tricks with extra payments to your mortgage or something similar. The more beneficial activity that happens behind the scenes, the better.
- Cultivate a peaks-and-valleys philosophy. If you haven’t read Peaks and Valleys yet, I recommend it–it took me less than an hour to get through the book. The basic concept is that you appreciate and manage the good times, while finding and using the good in bad times. If you come to understand the book, you’ll see why saving for a “rainy day” is such an important philosophy–it helps you get through the valley and onto the next peak.
- Catch yourself constantly. One of the most valuable characteristics of human beings is self-reflection. We are uniquely capable of analyzing our own thoughts and behaviors, and changing them at will. One of the ways we can control our ascent out of recession is constant self-reflection. Ask yourself–would I have done this a year ago? Is this a responsible use of my money, or am I spending just because I now can?
- Lock in your current behavior. One way to do this is to make note of all the relevant “ratios” that you can think of–debt to income, savings to income, etc. Another practical method is to monitor your net worth over a period of months and years. Finally, taking a “snapshot” of your budget–reminding you of how much you were spending during the recession, is another fantastic mental cue to take it easy.
- Curb your enthusiasm. Yes, I realize that’s the title of a hit HBO series. But it’s also a great strategy for not getting ahead of yourself during recovery. When financial circumstances get bad, we tend to resist lowering our spending habits. When times get better, we are quick to follow with our wallets. Slow down. Maintain a lower level of lifestyle, longer. Save the difference and experience the security of knowing that there is space between your income and expenses.
If Nothing Else…
If there’s one concept I would like you to take away from today’s post, it’s to have patience and react slowly to upcoming changes. While your financial situation may be far below “normal” right now, we don’t have to over-compensate when times are good and send it above that normal level.
Instead, we need to use the excess to prepare for the next downturn, so that we can maintain our “normal” level longer, perhaps through the entirety of the next recession.
How Will You Manage Recovery?
These are only my strategies for managing our mindset and finances through an economic recovery. What are some of the things you’re planning as times get better and we face the risk of forgetting how bad it got?
Photo credit: Refracted Moments via CC2.0
15 thoughts on “How to Stay Frugal and Focused in a Recovery”
I think sometimes we need to have a balanced approach to our change. If we get too excited and implement too many things too fast then we lose steam. If we don’t make enough progress right away we become discouraged.
Pacing yourself is key.
I’m particularly concerned about people getting big one-time bonuses or significant raises. If it’s the first time in a long time that they’ve seen an influx of money, they may get excited and start spending. Certainly–I know I would, so I’m taking steps to prevent that. 🙂
This post is SO true! We’ve collectively gotten into some good habits (thrift, increased savings, etc) in the past couple of years, and it would be premature to abandon those practices in favor of the next boom.
No matter what happens big picture, our focus needs to be on our own personal directions, and if we’re building up savings and paying down/off debt, we need to continue in that direction.
I know this sounds like a downer, but even in good times, we need to be preparing for the next recession. Heck, any one of us could have our own recession in the middle of a national economic boom.
I’m trying to focus on the personal aspect as well, but I fear that the “big picture” has more of an influence than we want to admit.
We tend to take our cues from what’s going on around us, and if that is extravagant spending, we will have to work that much harder to counter-act it on a personal level.
I completely agree on your final point (back to the peaks-and-valleys type of thinking).
Personally, I’m only slightly more frugal now than I have been the rest of my life. I see no problem with remaining careful with money for the future. I have promised my husband that we can loosen the purse strings a little as we get out of debt. When we are finished with the credit cards, for example, I’ll let him have some extra spending money again. (Right now, we’re concerned I’m going to lose my contract work, so all possible money goes to the debt.)
But I’m always going to be against indiscriminate, excessive spending. We don’t need every gadget that comes down the pipeline; we don’t need every bit of decor that catches our eye at the store.
Unfortunately, I’m pessimistic about Americans’ ability to remember this lesson. The recession is not nearly as bad as the Great Depression was, despite all the parallels people are drawing. It’s not enough to change a generation, especially when this generation was living so much larger than the majority of folks in the 20s. Yeah, there were some stock market fat cats. But many people devastated by the depression were just working folks who suddenly couldn’t find work.
Abigail–it sounds like you have things under control. Like you though, I’m concerned about the abilities of the average consumer. In averages (unlike real life, I believe), there has to be a winner and a loser–someone will stay frugal, and most will return to their old ways.
We will continue to use couponing after the recession clears. We became homeowners during the recession and we have lots of reasons to continue to tighten the belt.
.-= Ken´s last post: Setting Financial Goals: Get S.M.A.R.T. =-.
Congratulations on your new home! I’m happy that you were able to take advantage of the current market.
Couponing is one things that I haven’t really gotten into yet, although I understand the idea and how to do it. But I have found other ways of reducing grocery costs, like shopping at a different store.
I’m with your blogger bud, Wojo. I too, “don’t buy into the economy.” It wasn’t always that way with me though: When I was in my mid twenties and just getting my financial feet under me, I did temper myself to the economy. I know I did through the doldrums of the early to mid-1990s.
Lucky for me, over the past 20 years I have been able to maintain a course of saving, investing, and living within my means – just practicing responsible personal financial management. The reward for me, or anybody else who makes such a commitment, of course, is that eventually you become financially free-enough to pretty much do what you want, without regard to how the economy is doing.
Len Penzo dot Com
.-= Len Penzo´s last post: Drive-By Movie Review: Star Trek =-.
Agreed–the key I think is actually getting to the point where you can be that independent of what’s going on around you.
I don’t know–maybe it’s just me–but I see how people react to their friends and neighbors during good times, and during bad times, and I think it has a big influence on how we act with our money, even if we do it subconsciously.
But if you’re steadfast in your goals, like you were, to get to the point of independence, then yes–I think you should ignore the outside world and do what you think is right for yourself.
Len Penzo–I LOVE your last line, “The reward for me, or anybody else who makes such a commitment, of course, is that eventually you become financially free-enough to pretty much do what you want, without regard to how the economy is doing.”
IMHO, that line captures the essence and ultimate goal of personal finance. Not to have X amount of money, or be living a certain lifestyle or having certain investments, etc, but to be at a point of being able to break free of it all and to live a life of our own choosing. That’s a way of being rich without necessarily being wealthy.
.-= Kevin@OutOfYourRut´s last post: Finding Work by Working for Free =-.
After the Great Depression, that generation was changed for the rest of their lives. I remember when my Great Aunt died in the ’90s, my Mom gave us each a small stack of $100 bills that looked like they were from the ’50s. My Mom said my Great Aunt and Uncle never trusted banks after the ’30s and always kept some cash in a safe.
Fortunately, despite all of the media hype, the threshold of pain from this recession wasn’t anywhere near what it was in the Great Depression. So, many Americans will sign right back up for car payments as soon as they get a job. I hope at least some of the people who started saving the 5% will stick with it in the future. It sure is a comforting feeling to have money put away.
.-= Bret @ Hope to Prosper´s last post: Senators want new tax limit on health execs pay =-.
@Kevin: Ah, shucks… thanks! I just wish the Honeybee was that receptive to some of my other non-personal-finance lines! 😉
.-= Len Penzo´s last post: Black Coffee: My Favorite Blogs, Money News & Opinions #24 =-.
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