83585834One of my friends had a complaint about the personal financial press: why is it, she wondered, that they are telling people now about raising emergency funds and living below your means. Where were these columnists when her business was good and she had the money to set aside?

Suze Orman always talks about emergency funds, but most of the rest were writing about how to get the most value from your second house or how to buy stocks when things were going well.

Because I’ve been self-employed for ten years now, I’ve been forced to learn how to deal with irregular income. When things are good, I save. That way, I can spend at a steady rate when the work isn’t coming in and the customers are late with payment. Most people work for someone else and receive a steady paycheck, so they are more attuned to the mood of the times, and that is often reflected by advertising. When the economy is hot, advertisers have money to spend to entice you to buy what they offer. When the economy is not so good, the ads disappear, and then people writing about the economy become especially conservative.

Spending got us into this financial mess: spending money that people didn’t have on assets that weren’t as valuable as they thought, whether it was a condo in a new Las Vegas subdivision or a pair of Jimmy Choo shoes. But consumer spending is the engine of the economy. Personal consumption makes up about 70% of the gross domestic product, so when regular folks cut back, it hurts.

Now is a great time to be spending money, assuming you have money to spend. And you know what? A lot of people do. Most people have jobs, and some are getting raises. Bankruptcy lawyers are busier than they have ever been, and the good executives at AIG are collecting fine bonuses. The government’s stimulus package will give taxpayers an extra $8.00 a week to spend. Meanwhile, prices are falling because stores are desperate to attract customers. There are plenty of bargains to be had!

Not all spending is equally good for the economy, though. Economists talk about the velocity of money, which is the number of times a bill changes hands. If you cash your paycheck and put the money under your mattress, it doesn’t generate any economic growth. In more normal times, you can put the money in the bank, and then the bank loans the money out to a business, so the cash keeps moving. Banks aren’t terribly interested in lending these days, leaving spending as the way to get more money into the economy.

So, what should you do? First, spend money on services. Take taxis. You give the cabbie $20. When his shift ends, he gets lunch at his favorite diner and leaves a few bucks as a tip. The restaurant owner now has funds to buy more vegetables at the market, and the waiter takes his tip to a barber to get his hair cut. Your few dollars goes to work helping several businesses.

Meanwhile, you take a taxi to a neighborhood boutique to buy some clothes and maybe a necklace for a birthday present for a friend. Those purchases are a large percentage of the shop’s total business, so it helps keep the doors open and someone employed under better conditions (I would hope) than at Wal-Mart. If the necklace was made by a local artisan, then you’ve kept more money in the community.

If you aren’t feeling comfortable about frivolous spending, you can still go to Target. Yeah, your dollars won’t make a big difference in the chain’s success or failure, the workers don’t make great money, and the goods are all made in China. But the company is an employer and part of the economy. Here, you can stock up on basic items as a form of an emergency fund. Hit the clearances for hats and gloves, casual Friday golf shirts, and kids’ jeans three sizes up from where your kids are. That gives you an inventory to draw on in the future.

Once the recession is over and you’re back on your feet, let everyone else spend. You can wear that lifetime supply of khakis picked up at this year’s clearance sales, then start building an emergency fund to cover six months of expenses. Sooner or later, you’ll need it.

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About the Author

Ann Logue

Ann Logue is a freelance writer and consulting analyst who is fascinated by business and technology. She has a particular interest in regulatory issues and corporate governance. She is the author of "Emerging Markets for Dummies" (Wiley 2011), “Socially Responsible Investing for Dummies” (Wiley 2009), “Day Trading for Dummies” (Wiley 2007), and “Hedge Funds for Dummies” (Wiley 2006), and has written for Barron’s, Institutional Investor, and Newsweek Japan, among other publications. As an editor and ghostwriter, she worked on a book published by the International Monetary Fund and another by a Wall Street currency strategiest. She is a lecturer in finance at the University of Illinois at Chicago. Her current career follows 12 years of experience as an investment analyst. She holds a B.A. from Northwestern University, an M.B.A. from the University of Chicago, and the Chartered Financial Analyst designation. How's that for deathly dull?

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