In a lot of ways, the recent recession has been a major wake up call. We realize that many of the complicated and creative financial products that ushered in a boom of ridiculous proportions also result in greater economic instability in the long run. Economic booms cannot be forever sustained by debt-fueled consumer spending. Indeed, as painful as it would be for us personally, and probably even for the economy, getting back to financial basics may not be a bad idea.
No, we wouldn’t see explosive economic growth if we all began practicing prudence in matters of personal economy. But we would be better off individually, and perhaps the economy would be a little less unstable. Would we still see recessions? Probably. But would we be as financially devastated by them? Perhaps not.
So, how can we get back to the financial basics? First it helps to know what they are. The financial basics include such things as:
- Earning more than you spend; living within your means.
- Looking for ways to save money when you can.
- Saving up for larger purchases.
- Setting aside money for emergencies.
- Creating an investing plan for your future financial provision.
- Using credit sparingly — and wisely.
- Choosing modestly when buying “big” things (homes, cars, education) with credit.
Understanding these basic tenets of basic financial prudence can go a long way toward helping us get back on track with our finances. When we are in a financially sound position, we are less stressed, more secure, and better able to take advantage of opportunities that come our way.
Changing the Money Mindset
The first issue is to change the money mindset that many of us have. Indeed, our entire society is obsessed with image and status, and we tend to connect financial wealth to higher status. Indeed, often worth as a person is confused with net worth. When we buy into the idea that others will respect us more because of our income, or our stuff, we are prone to make decisions with our money, getting an interest only loan to “afford” a bigger house, or getting more student loans than we can really pay back to attend a prestigious school.
Another problem is that we are a society that demands instant gratification. We believe that we deserve things. And we deserve them now. This is one of the reasons that credit card debt has risen so much. We think that we can afford to make purchases that we don’t have ready money for. The low minimum payments make us feel as though there is no reason to wait to buy something. Unfortunately, as credit card debt grows, your personal finances are likely to diminish. Moving beyond this mindset of instant gratification would be a big help in getting back to financial basics.
Indeed, mindset has a great deal to do with our financial habits. As long as we attach a great importance to displays of wealth, and as long as we feel that we have to have things immediately, rather than saving up for them, we will remain stuck in a cycle that looks quite similar to the one that brought on the latest recession.
Photo dichohecho via Flickr