The much talked about and dreaded US fiscal cliff ended with a tax deal and without causing much damage to the financial system. There are sighs of relief all around that the US economy is on the right course to a full recovery. This doesn’t mean you should be complacent about your own personal finances, however. For many Americans, times are still tough and the chances of being laid off or becoming bankrupt are still high. But the recent economic crisis has taught us all one thing and that is to be adequately prepared for the future.
As a general rule, we Americans tend to think ‘big’ always – like big car, big house, big apartment, big wedding and practically ‘big’ everything. In good times, thinking big is good for business, which ultimately comes handsomely back to you. However, when the national economy and your own finances begin to go down the drain, thinking ‘big’ usually lands you in a financial pit that will take you years to climb out of – possibly never.
The point is you have to be prepared for all kinds of eventualities even if the going is good for you at the moment and there is a big wad of cash in your bank account. Here are some tips on how to avoid your own personal financial cliff.
Stash away some money for emergency use: This should probably be your rule number one for financial prudence. No matter how little you can spare after your monthly expenses, stash away some for the rainy days. You may have to deny yourself some of your favorite things, but that’s a lot better than having no money when you need it the most. Don’t be too concerned with the extremely low interest rate that your bank gives you; just keep this money liquid and accessible so that you can have it if you need it at a moments notice.
Nurture a healthy spending manner: For many of us, our spending habits are our biggest enemies. When you have a lot of cash, you can afford to spend extravagantly, live big and dream big. It’s when the money begins to dry up that you will start to feel the pinch. But once a bad habit is formed, it’s tough to give it up. So nurture a healthy spending manner before things get out of hand. Do not spend more than necessary even if you have a fat bank account and live within your means.
Fight off your personal weakness for things: Everyone has a weakness for expensive things such as electronic gadgets, culinary delicacies, and top of the line clothes and cosmetics. Many people foolishly max out their credit cards on things they can do without only to rue it the day they are hauled to the court for non-payment. If you can afford to finance your weaknesses, then that’s fine as long as you are careful not to go overboard with it. But if you cannot, then never make the mistake of financing it with a loan or from your saving.
Protect yourself with insurance: The future is always uncertain and you never know where or in what situation you will end up in the future. You must have read of former six-figure-salary-earners who are broke and homeless now. These people forgot to protect themselves when the going was good. One of the ways to protect yourself from falling into such hard times is to insure yourself. Research the market and purchase the right coverage, including disability, property, casualty and long-term care. Purchase a life insurance to protect your family (especially children) in case of your accidental death.
Set aside some funds for retirement: In Australia, they have a retirement fund called superannuation fund where it is compulsory for every adult to set aside some money for retirement and an equal amount is contributed by the federal government. Sadly, we do not have such a schemein the USA. Still, there is the 401(k), individual IRA and other retirement plans that are almost as good. Setting aside some money in one of these funds does not only ensure money when you retire, but also reduces your tax liability now. Another benefit is that investing the money from your retirement fund makes you exempt from capital gains taxes.Thus, you have only gains to make by putting money in your retirement fund.
How To Avoid Your Own Personal Financial Cliff was included in the following carnivals:
Carnival of MoneyPros at Family Money Values
Carnival of Retirement at Midlife Finance
Finance Carn. for Young Adults at Money Life and More
Yakezie Carnival at The Ultimate Juggle
great article. i have that problem. when my wallet is fat sometimes i forget to put aside money for a rainy day. sometimes i spend too much on stupid things. this is a great reminder.
Don’t beat yourself up Jodi, we all can improve our finances in some way or another. I am glad you enjoyed the article.
Good points all. It’s not complicated but so many people fall into a trap of watching the years go by and one day looking up and realizing that a decent retirement is not within their reach.
That is so true!
The hardness battle to win is when you have to fight off your personal weakness for things especially now that technology seemed to be the strongest weapon being used to feed our weakness. Nothing is ever enough, we always want the latest–mobile phones, gadgets, technology, and fashion. I am doing my best not to fall prey to my wants and to save as much as I can for emergencies and my early retirement plans. I just hope I manage to stick to my goals.
It can be very difficult because there is so much pressure. All the advertisements don’t help either.
Good post! There is one other thing to keep in mind, and it’s being intentional and aggressive about getting (and staying) out of debt.
There’s another recession coming in a few years — there has always been one every 7-10 years, almost like clockwork. And the good times (and yes, compared to the Great Recession these are actually good times) are the best times to get out of debt so the next recession isn’t so painful…
I paid off my mortgage and car loan in 2011 and I was extremely aggressive. I cut everything and looked for ways to make extra money. I personally wanted to pay off my mortgage and car loan more than I wanted to buy new clothes. That’s just me though! Now I can buy all those clothes if I want.
Last year I wasn’t able to stash too much away due to having taken the leap, but now this year with things a bit calmer I should be able to get more of that taken care of. We also have a wedding ahead this year, so now it all comes down to planning and staying the course, and avoiding our own fiscal cliffs on each side!
Great message! Wise thing is to always live way below norm for your income level. You can’t go wrong by having a stash to protect your financial future.
Actually in reference to the Australia example your referenced, its actually the obligation of the employer to set aside some money for the employee in a superannuation fund (i believe this number is 6%). Its like a compulsory 401k contribution paid by your employer.
Very sensible points here. Of course, nobody wants to be in a financial cliff so things regarding financial matters should be planned accordingly.
Great list. I would say that my biggest struggle is fighting off my weaknesses for things. That isn’t always easy, especially when you are stressed and tired and looking for comfort.
Sometimes it can be hard to save when you are living paycheck-to-paycheck. I always remind people who seek my financial advice that even saving something is better than nothing. It is surprising how quickly spare change can add up, for example. Getting in the habit of saving can put you on the right track.