One 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 IÁ¢€™ve been self-employed for ten years now, IÁ¢€™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 isnÁ¢€™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 didnÁ¢€™t have on assets that werenÁ¢€™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 governmentÁ¢€™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 doesnÁ¢€™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 arenÁ¢€™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 shopÁ¢€™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 youÁ¢€™ve kept more money in the community.
If you arenÁ¢€™t feeling comfortable about frivolous spending, you can still go to Target. Yeah, your dollars wonÁ¢€™t make a big difference in the chainÁ¢€™s success or failure, the workers donÁ¢€™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 kidsÁ¢€™ 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 youÁ¢€™re back on your feet, let everyone else spend. You can wear that lifetime supply of khakis picked up at this yearÁ¢€™s clearance sales, then start building an emergency fund to cover six months of expenses. Sooner or later, youÁ¢€™ll need it.