Money Obedience

So here we are, in a recession. Apparently we have been in one for about a year now.

There is plenty of advice floating around about what I should do with my finances now. The advice may come in a little too late for many. So, in this post, I want to discuss two of the “great” suggestions I recently read to prepare (?) for a recession. (1) Get an emergency fund. (2) Lower your debt.

Let’s tackle the emergency fund first. Well, I know, and they advise, that I am supposed to have an emergency fund at any given time. In fact, according to most financial advisors, my emergency fund should cover between three and six months of my monthly expenses. (Yes, I know that’s a lot, but that’s the recommendation.) The idea is that I am supposed to draw on these savings when unforeseen events will make it difficult for me to meet my expenses from my income. What kind of unforeseen events are we talking about? Unemployment from firings or layoffs; health problems from disease or accidents; uninsured loss from fire or theft. Even something like our plain old recession – maybe I keep my job, and I’m in good health, but this year, I won't get as much of a bonus or sales commission. Right now, it might be a little late to put money into an emergency fund – after all, we are in a recession already. But that is exactly why they say it is important to use the good times to prepare for the bad times. The bad times inevitably appear, and it is much harder to "prepare" for the hard times when the hard times have already come. I am glad that I was lucky enough to be able to have some money stashed away already, “just in case.”

Anyway, I face the same problem deciding when I should lower my debt. You see, initially, building an emergency fund and lowering my debt require the same action. I can’t do either unless I first spend (a lot) less than I make. The only difference between these two goals is the way I use my savings in any given month. I need to save money, whether I apply it to an emergency fund or towards my debt. But, just like it is with making an emergency fund, if the economy has already turned sour, it may be a little late for me to focus on lowering my debt. Fortunately for me, I have always been quite concerned about loading up on debt. Sure, I lose out during the bonanza years – I was paying down debts, or making sure I didn’t get any new ones, when it seems that everyone else was doing so much better than I was. I can only imagine that many of the people I know were living so well because they were living on credit, but I can’t be sure. What I do know is that when things take a turn for the worse, I won't have as many worries as the fellows who were riding high during the good years and are paying for it now.

In any case, you might think it’s useless for me to talk about pieces of advice that tell you to get an emergency fund and lower your debt, since you (like me) may very well have hit the hard times already. But, if you’re one of the lucky ones, know that the time is now to get started on these goals, while you can! It is never too late to get a handle on one's financial life. The very first step is to spend less than you make, and today is as good as any to start with that. And just start: whether you use these savings to pay down debt, establish an emergency fund, add to your retirement fund or other financial goals does not matter much. If you’re only getting concerned about your personal finances because we’re in the face of recession, so be it. All of us should continue on this path, for eventually we’ll be in a place where things, once again, will look a lot better.