This is also not my prediction. There's this article, and this one, and this one, and this one, and this one, and this one, all with different experts talking about various reasons why we should be worried about the economy. Some point to credit card debt (which is as high as it was at the start of the 2008 recession) or student loan debt (which is now counted in trillions, and has never been higher), others to national debt, or all of that debt put together, which is enough that it should be worrisome even without the economic implications. Others point to stock market indicators like the "Buffett valuation indicator", and charts for various signs to look for. The thing is, they're not wrong. At some point, one of these things will go belly-up and then the rest of it will be in big trouble. Which means that we will all be in trouble.
Last, there are rumblings that the "recovery" was not actually a recovery. Basically all of the gains went to the already wealthy, and those of us who weren't born to crazy wealth are a bit worse off. I can't say I disagree with that assessment, considering that in these happy magical boom times, somehow around half of the people in the richest, greatest, and best nation on earth can't afford basic needs. Homelessness is up. People can't afford food, or medical care. It's like GDP doesn't actually measure how well individuals are doing, or that jobs which don't even pay minimum wage and don't give any benefits aren't doing anyone any favors. Crazy. Or, it's like having corporations do stock buybacks to enrich their already wealthy shareholders while suppressing wages is creating huge income inequality. Who knew?
So, with all of that lovely news, what can and should we do about this? The first thing, clearly, is for each of us to take stock of our actual financial picture. I like to do this about every six months or so for my household. I go through and figure out exactly how much money we have saved up and how much we owe in debts. It hurts a little, right? Yeah. But hopefully that's a good thing. After all, we can't figure out where to focus our efforts without the little bits that pinch. Maybe it's a credit card you haven't paid off, or that mountain of student loan debt, or the mighty mortgage payments every month. Whatever hurts, there's a reason for it.
And what hurts, that's what I focus my attention on. If it hurts now, when things are relatively good, then it's going to be a lodestone when things crash. Do what you have to to ensure that it can't bite you even worse later on.
A little story:
I was lucky enough that my parents paid my college tuition. I did a lot to help them out. I paid my living expenses through my own jobs, I went to community college first, and I went to a University where I got in-state tuition. But still, my tuition was paid for. I was lucky enough to pay that forward a little. I graduated before HusbandX did and got a job with the University. It didn't pay much but it was a labor of love. One day, I realized that my then-boyfriend and I didn't actually have to be married to get partner benefits. One was healthcare, but the other was free tuition. Score! We jumped through a few hoops, like opening a bank account together, and he finished his degree while only having to pay fees for the last of it.
After HusbandX graduated, he got a job. That disappeared after four months because he graduated right into the recession. The same thing, pretty much, happened with his next two jobs. Luckily, we had continued to live as if we were still college students, mostly off of my salary (less than $30,000/year, sometimes less than $25,000/year net) and saved in our own "boom" times. Meanwhile, the student loans went into deferral and racked up interest. We got married, and his debt became my debt. Thanks, love! At some point, flush in the pocket due to double employment, we decided that we should start paying off those loans. Instead of going for the minimum, however, we decided to set the bar at $600/month. This was what we thought, fancy-free childless people that we were, was a reasonable amount to pay back monthly against $35,000. Not as much as we would like, but a reasonable amount.
Somewhere in there we had a kid. HusbandX went back to school and his income dropped into the low hundreds of dollars per month. We moved, and were mostly jobless for two years. We lived with my parents. And still, we paid $600 every month like clockwork. It was not easy. We could have let the loans go into deferral again and gather more interest. It would have wiped out all of the gains we'd made by paying them off so aggressively, but conventional wisdom said that it would be fine, we could pay it back later! Obviously, we didn't go that route, and just kept paying. We dipped into our savings to make the payments, but that was why we had the savings. We prioritized paying back our debt above most other things.
Almost exactly a year ago, we realized that the debt had gotten low enough that, even without totally wiping out our emergency fund, we could pay off the rest in one swoop. $10,000 or so gone, just like that. If we hadn't done that then we would still be paying $600 a month toward that debt. Every single month. By paying it off early we saved ourselves about 18 months of payments and a little over $500 in interest. Seems pretty worthwhile, right? That's not even what I appreciate the most, however. Not having that debt hanging over our heads, and the large payment every month, has been so freeing. And now we have no student loans while most of our peers are still paying the monthly minimum.
What to do with all of this information?
We were able to do this not because we've made tons of money through our lives--on the contrary, most of our marriage has involved very low salaries punctuated by a few months of relatively high earnings. We were able to pay off this debt because we worked hard at it. That is so underrated in our society. We didn't spend our money on unnecessary and frivolous crap. I hate to say it, but most people do. If you ever wonder where your money has gone, you should probably look around you. If you can find even a few unnecessary things in just a quick scan, you have your answer. We prioritized paying off our debt while most people prioritize Things.
When you have a debt to pay, the minimum monthly payment is just that. The minimum. It is not designed to help you, or for your convenience, or to benefit you in any way. It's designed to keep you paying at that debt as long as it can be dragged out, so that the lender can gather as much interest from you as possible. It's usury, plain and simple. Put your debts through a debt calculator to figure out how much money you'll be paying in the long run. With the $35,000 we owed in student loans, the average interest rate was 6% (I think--it might have been more). If we'd paid half of what we did, only $300 each month, that would have taken us almost fifteen years to pay off. It would also have cost us almost $53,000 in the end thanks to interest. As it is, since debt is always front-loaded with interest (that is, you pay more interest at the beginning of your repayments) we still paid almost $40,000. Ouch. Ouch. I can think of so many better things we could have done with that extra 5k than spend it on interest.
I don't say all of this to brag about how awesome we are. I want to help other people feel as secure as we do, because it's important. Debt is so rampant in our culture, however, that people have gotten used to it. They feel comfortable with it, even if they're not secure. However, I have a radical notion and it is this: you cannot feel good if you do not feel secure. If you constantly feel as if you're one or two paychecks away from losing everything, that is a source of stress, not happiness.
One major part of our security has been that we plan for the worst. I have friends who've described this quite aptly as the "inner bag lady". When you get anxious and think about all the worst possibilities that could happen, that's your inner bag lady talking. For me, my inner bag lady whispers about a lot of things. A lot. The key is that I listen to her just enough that I have a plan in place for all of these things. Seriously. I won't go into all the ridiculous scenarios that my IBL (inner bag lady) has come up with for me to fret about in the dark of the night, but suffice to say that I know I have plans in place and that allows me to tune out the IBL's worst ravings. I let her prod me into making better financial choices, but other than that I am able to ignore her.
People who do not prepare themselves for bad things, however, end up having to listen to their IBL more often. What if I miss a payment and the car is taken away? Or, I can't lose my job because I NEED it. When little things crop up, and they always do, those who are not prepared for such emergencies end up with more stress and more worries than those of us who plan and prepare for such things. Just this year, we finished paying all of the bills for the birth of Little Miss Sunshine, a planned expense, and then the bathtub in our basement cracked. Decidedly not planned. But it was okay, we had the savings to cover that too. And again to cover the cost when our car got a flat tire a few weeks after the bathtub was fixed. Again, this is why we had the savings. All the scrimping and saving and watching our pennies is worthwhile to not have any worries when emergencies crop up.
Each person should have 3-6 months, or more, of living expenses saved up as an emergency fund. It should be money that you can access within 30 days or less. Having equity in a house does not count, nor does a retirement fund. We have our e-fund in three different places, as an added layer of security. The first and most obvious is in our savings account. But we also have a small amount in an index fund, so that it will gain interest faster than our savings account. (It's not much--I think I could have bought a drip coffee every other week with the gains this year, had I been so inclined.) The third place is in a different, international investment. This diversity gives us a variety of safeguards. If the stock market tanks and we lose everything in the index fund, oh well. If our credit union, for some reason, goes belly-up it's still not the end of the world. If the third fund turns out to be run by a Bernie Madoff wannabe* then we won't lose all of our emergency money.
Every single person should have this, if at all possible. I know, there are plenty of people for whom that is a distant reality. So much more reason why the rest of us should have our shit together. Assistance should be for those who really need it, not those who had opportunities and pissed them away on crap.
As a couple, and that part is important in a relationship, HusbandX and I have always set our finances up as if we expect life to come crashing down around us. This is partly because it usually does at some point. Since we're Millennials (maybe?) this experience is not unusual. What is unusual is that we always have the money to cover the crash. Most people don't. Don't be most people.
When you have a debt to pay, the minimum monthly payment is just that. The minimum. It is not designed to help you, or for your convenience, or to benefit you in any way. It's designed to keep you paying at that debt as long as it can be dragged out, so that the lender can gather as much interest from you as possible. It's usury, plain and simple. Put your debts through a debt calculator to figure out how much money you'll be paying in the long run. With the $35,000 we owed in student loans, the average interest rate was 6% (I think--it might have been more). If we'd paid half of what we did, only $300 each month, that would have taken us almost fifteen years to pay off. It would also have cost us almost $53,000 in the end thanks to interest. As it is, since debt is always front-loaded with interest (that is, you pay more interest at the beginning of your repayments) we still paid almost $40,000. Ouch. Ouch. I can think of so many better things we could have done with that extra 5k than spend it on interest.
I don't say all of this to brag about how awesome we are. I want to help other people feel as secure as we do, because it's important. Debt is so rampant in our culture, however, that people have gotten used to it. They feel comfortable with it, even if they're not secure. However, I have a radical notion and it is this: you cannot feel good if you do not feel secure. If you constantly feel as if you're one or two paychecks away from losing everything, that is a source of stress, not happiness.
One major part of our security has been that we plan for the worst. I have friends who've described this quite aptly as the "inner bag lady". When you get anxious and think about all the worst possibilities that could happen, that's your inner bag lady talking. For me, my inner bag lady whispers about a lot of things. A lot. The key is that I listen to her just enough that I have a plan in place for all of these things. Seriously. I won't go into all the ridiculous scenarios that my IBL (inner bag lady) has come up with for me to fret about in the dark of the night, but suffice to say that I know I have plans in place and that allows me to tune out the IBL's worst ravings. I let her prod me into making better financial choices, but other than that I am able to ignore her.
People who do not prepare themselves for bad things, however, end up having to listen to their IBL more often. What if I miss a payment and the car is taken away? Or, I can't lose my job because I NEED it. When little things crop up, and they always do, those who are not prepared for such emergencies end up with more stress and more worries than those of us who plan and prepare for such things. Just this year, we finished paying all of the bills for the birth of Little Miss Sunshine, a planned expense, and then the bathtub in our basement cracked. Decidedly not planned. But it was okay, we had the savings to cover that too. And again to cover the cost when our car got a flat tire a few weeks after the bathtub was fixed. Again, this is why we had the savings. All the scrimping and saving and watching our pennies is worthwhile to not have any worries when emergencies crop up.
Each person should have 3-6 months, or more, of living expenses saved up as an emergency fund. It should be money that you can access within 30 days or less. Having equity in a house does not count, nor does a retirement fund. We have our e-fund in three different places, as an added layer of security. The first and most obvious is in our savings account. But we also have a small amount in an index fund, so that it will gain interest faster than our savings account. (It's not much--I think I could have bought a drip coffee every other week with the gains this year, had I been so inclined.) The third place is in a different, international investment. This diversity gives us a variety of safeguards. If the stock market tanks and we lose everything in the index fund, oh well. If our credit union, for some reason, goes belly-up it's still not the end of the world. If the third fund turns out to be run by a Bernie Madoff wannabe* then we won't lose all of our emergency money.
Every single person should have this, if at all possible. I know, there are plenty of people for whom that is a distant reality. So much more reason why the rest of us should have our shit together. Assistance should be for those who really need it, not those who had opportunities and pissed them away on crap.
As a couple, and that part is important in a relationship, HusbandX and I have always set our finances up as if we expect life to come crashing down around us. This is partly because it usually does at some point. Since we're Millennials (maybe?) this experience is not unusual. What is unusual is that we always have the money to cover the crash. Most people don't. Don't be most people.
But wait! I said above that most of us aren't experiencing an economic high right now, that wages are depressed and it's harder for the average person to get by. Yet I'm still saying that people should save out of their meager pay?! Yes, that is correct. I know it's hard. But again, if things are hard for the average person right now, it won't get any easier during the next recession. Layoffs and foreclosures and seized assets are going to take an even bigger toll the next time around because the buffer just isn't there anymore for so many people.
Weeding out the chaff
There's one more hidden advantage to making the necessary cuts to save money and pay off debt "aggressively". Because we prioritize these two things we have also learned exactly what is important to us and what is not. We have identified our needs and all else is unnecessary fluff. Which is not to say that we never buy fluff, just that we keep it to a minimum.
As an example, I recently purchased a new bike saddle. This, to my mind, straddled the line between "need" and "want." I had a saddle, one that was not worn out or damaged. However when I started riding again after Little Miss Sunshine was born, it hurt. I was saddle sore for weeks. It mostly faded, but there were still new pressure points. After several months of dealing with an uncomfortable saddle (which can cause lasting damage, BTW) I sprung for a new one. It was pricey, over $100. I even paused for a whole month before finally purchasing it, because I wanted to be absolutely certain that it was really what I needed. Now...oh boy, riding my bike and not being sore is wonderful. Not only that but this purchase also advances one of our family's goals (health), and it makes my rides more fun. Fun bike rides = more bike rides, less driving or transit, and also a happier, healthier Mom. Wins all around! (My favorite.)
Conversely, almost all of the furniture in our house was free. Buying a house is a usual time for people to go more than a bit spendy, buying new furniture, pots and pans, towels--new everything--to fill the house. We lived with a mostly bare house for most of last summer, slowly accumulating our motley collection of free furniture. The only item we purchased was our mattress. Even the bed frame was given to us by my brother-in-law. I can live with hand-me-down furniture, including the section of the couch where the seams are pulling apart. I even like that a lot of the furniture is not new--we have the dining table and chairs that my grandmother gave to my parents when they got married. (She reportedly got the table at a garage sale for something like $20. Go grandma!) We have the bedroom set that belonged to my grandfather and his brother, for my girls. The couch that's looking kinda worn is also super comfortable. Many a nap has been taken on there, and a few night's sleeps.**
We are slowly spending money on our house as we identify what matters to us, but furniture is waaaaaay down the list. We'd rather spend that money making ourselves actually, rather than superficially, more comfortable. Insulation for the house is our big project this fall.*** It will serve us well for many years to come, through good times and bad. When the next recession comes I won't be cursing the insulation, which I would if I'd instead bought a new couch--especially on credit. Prioritizing things as we do means that we will also be much more comfortable over the long term. We are more comfortable now than many of our peers who are deep in student loan debt, but we will also be more comfortable as debt and lifestyle creep catch up to our peers who continue to pay the minimums, often racking up more debt in the meantime. We've planned for the very worst and since that is unlikely to happen, anything else that comes our way is something that we can handle. We've taken care of those worries in advance, rather than letting them pile up later on.
*My brother-in-law is working for this company, and I'm confident that he would know if it was a scam. It's a small operation. As a general rule, however, I don't recommend investing any money outside of large corporations with a proven track record.
**My only excuse is that David Attenborough is pretty damn soothing when you're tired. So easy to fall asleep listening to him talk elephants and snails.
***After the rebates from our utility, the price will come in just over $1000. Not too shabby.
Weeding out the chaff
There's one more hidden advantage to making the necessary cuts to save money and pay off debt "aggressively". Because we prioritize these two things we have also learned exactly what is important to us and what is not. We have identified our needs and all else is unnecessary fluff. Which is not to say that we never buy fluff, just that we keep it to a minimum.
As an example, I recently purchased a new bike saddle. This, to my mind, straddled the line between "need" and "want." I had a saddle, one that was not worn out or damaged. However when I started riding again after Little Miss Sunshine was born, it hurt. I was saddle sore for weeks. It mostly faded, but there were still new pressure points. After several months of dealing with an uncomfortable saddle (which can cause lasting damage, BTW) I sprung for a new one. It was pricey, over $100. I even paused for a whole month before finally purchasing it, because I wanted to be absolutely certain that it was really what I needed. Now...oh boy, riding my bike and not being sore is wonderful. Not only that but this purchase also advances one of our family's goals (health), and it makes my rides more fun. Fun bike rides = more bike rides, less driving or transit, and also a happier, healthier Mom. Wins all around! (My favorite.)
Conversely, almost all of the furniture in our house was free. Buying a house is a usual time for people to go more than a bit spendy, buying new furniture, pots and pans, towels--new everything--to fill the house. We lived with a mostly bare house for most of last summer, slowly accumulating our motley collection of free furniture. The only item we purchased was our mattress. Even the bed frame was given to us by my brother-in-law. I can live with hand-me-down furniture, including the section of the couch where the seams are pulling apart. I even like that a lot of the furniture is not new--we have the dining table and chairs that my grandmother gave to my parents when they got married. (She reportedly got the table at a garage sale for something like $20. Go grandma!) We have the bedroom set that belonged to my grandfather and his brother, for my girls. The couch that's looking kinda worn is also super comfortable. Many a nap has been taken on there, and a few night's sleeps.**
We are slowly spending money on our house as we identify what matters to us, but furniture is waaaaaay down the list. We'd rather spend that money making ourselves actually, rather than superficially, more comfortable. Insulation for the house is our big project this fall.*** It will serve us well for many years to come, through good times and bad. When the next recession comes I won't be cursing the insulation, which I would if I'd instead bought a new couch--especially on credit. Prioritizing things as we do means that we will also be much more comfortable over the long term. We are more comfortable now than many of our peers who are deep in student loan debt, but we will also be more comfortable as debt and lifestyle creep catch up to our peers who continue to pay the minimums, often racking up more debt in the meantime. We've planned for the very worst and since that is unlikely to happen, anything else that comes our way is something that we can handle. We've taken care of those worries in advance, rather than letting them pile up later on.
*My brother-in-law is working for this company, and I'm confident that he would know if it was a scam. It's a small operation. As a general rule, however, I don't recommend investing any money outside of large corporations with a proven track record.
**My only excuse is that David Attenborough is pretty damn soothing when you're tired. So easy to fall asleep listening to him talk elephants and snails.
***After the rebates from our utility, the price will come in just over $1000. Not too shabby.
