The upside of the down economy

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Financial news has been brutal. Stocks are down, unemployment is up, banks are failing and the housing market is still smoldering after the crash. In the past two years, those who continued to play by the old fiscal rules — buying a home instead of renting, investing in the stock market for growth and fixed income for a safe haven — are now left feeling as if they’re wandering in the desert without a map. The old laws don’t seem to apply anymore, and guidelines for a shifting economy remain teasingly mirage-like.

Is there any upside to this recession? It may not seem like it if you’ve been laid off, lost your home or are living paycheck to paycheck, but there are some encouraging trends that could prove more sustainable than the credit-fueled house of economic cards we indulged in before the recession. Mostly they involve the ever-popular concepts of financial prudence and budgeting.

Save more

If you’re looking for a silver lining in the recession, consider that Americans’ savings rate has increased in the past couple of years.

In 2005, the savings rate dropped into negative numbers for the first time since the Depression, meaning Americans spent more than they earned and relied on leverage to make up the difference.

New lessons to live by
  1. Save more
  2. Learn to rely less on credit
  3. Buy goods and services on sale
  4. Invest in equities on sale
  5. Rediscover your career passion
  6. Re-examine your relationship with money

But the latest statistics from the U.S. Bureau of Economic Analysis indicate that savings increased to nearly 3 percent by the end of 2008. While some economists dispute whether the numbers factor in all forms of income, the upward trend seems to suggest that we’re moving in the right direction, at least.

If you’re not in the habit of saving, how can you get started? Ronald T. Wilcox, professor of business administration at the University of Virginia and author of “Whatever Happened to Thrift?” says that if you ask the average person if he can save more, the answer is typically no. But one way that has proven effective, according to Wilcox, is to immediately channel a pay raise (assuming you get one) into your 401(k).

People will generally stick with that tactic, Wilcox says, because they never see the money. It’s a psychological trick, to be sure, but one that works. This, of course, is also a good idea if you’ve never saved at all. Immediately sign up for your company retirement plan so you never actually get the money in hand. You’ll sock away a nest egg without even thinking about it.

Wilcox also sees a sustainable lesson for the future in this exercise: If people save and learn to live within their means from this recession, we’ll be in a much more stable situation and less reliant on credit when the economy improves.

“Lack of savings made for very fragile consumption,” he says. The down ticks in the economy are more severe when people are overleveraged. “Once we’re back in reasonable economic times, it won’t be quite as frail,” says Wilcox.

Learn to rely less on credit

Coupled with the increased savings rate is a drop in consumer spending and credit card use.

On April 7, The Federal Reserve said that credit card borrowing fell by nearly 10 percent in February and, according to its G.19 survey, revolving debt has been declining since the beginning of the fourth quarter of 2008, which suggests people are learning to live on cash and delaying the purchase of new big-ticket items like cars.

Nearly everyone has experienced a tightening of credit, and with credit card companies imposing reduced credit limits on cardholders, consumers are forced to rein in the use of debt. So now is a good time to use these penalizing terms to revise your relationship with your credit card.

Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling in Silver Spring, Md., recommends people track their spending in order to better understand their habits rather than mindlessly pulling out the plastic every time they make a purchase. “That’s really no fun, but everyone can commit to 30 days,” she says. At the end, you can analyze where you might have the opportunity to save and use less credit.

“Credit should be used as a convenience, not as a lifestyle,” Cunningham says. “When we live on a cash basis, we’ve found that you save about 20 percent,” she says. “At the checkout counter, you’ll be peeling off cold hard cash,” and most people react negatively to that immediate insult to their wallet.

Another good habit to establish while reducing your use of credit cards is to make sure the credit card balance never exceeds 30 percent of your credit limit. “If it does, power-pay that card down first,” Cunningham says, “because if you exceed that limit, you can practically watch your credit score drop.”

Buy goods and services on sale

Not everyone is feeling the hangover of an abundance of credit, and those who have consistently saved and feel secure in their jobs will find some deals. If you’ve been putting aside money for a backyard pool, for instance, your patience could be rewarded with cheaper prices on labor and materials.

But even though you can find a great deal on many goods and services, should you do it? Hank Boyd, Tyser teaching fellow at the University of Maryland, says first ask yourself if it’s a necessity or a luxury.

America’s wheels of capitalism turn on consumer spending, he says, trickling through the economy to affect jobs. But our takeaway from this recession should be a certain amount of prudence when it comes to spending money.

“If there are certain things you know you need and you can get them on sale, it makes sense to buy,” Boyd says. There are bargains out there, and companies are getting competitive in their pricing. Those with the cash literally hold the purse strings, he says.

But he cautions that you should only pay on credit if it’s a necessity, not a luxury, and keep that habit even when the economy improves and spending picks up again.

“We like consuming,” Boyd says. “It’s part of the American psyche.” But he advises people to establish an emergency fund that stays in place even during good economic times. And don’t be tempted to dip into it unless you suffer a job loss, and then only for living expenses.

“Some people will develop good habits out of this,” he says, with a mindset more like the Depression-era generation, which didn’t go as deep into debt. “My grandparents saved money and spent money, but they spent wisely.”

Invest in equities on sale

For those in a position to invest, the advice of Bruce Howard, professor of business and economics at Wheaton College, is simple, “Buy when it’s on sale.” That, of course, is now, when the stock market has been hovering around 50 percent to 60 percent of what it was in October 2007. Though the bottom can’t be predicted, everyone recognizes that prices are much cheaper now than they were then. Why pay top dollar?

Mark C. Connell, president of Mark-Christopher, a financial firm in Addison, Texas, says he pulled his clients’ money out of the market when it was near its peak and is planning to reinvest this fall when he thinks the market will come close to its trough.

But the market’s ups and downs are difficult to predict even if you are an expert, let alone a novice. So if you rode the S&P to its recent lows of 6,400, don’t get out of the market now, Connell says. If you don’t need the money for at least 10 years then continue to invest and take the ride back up.

“Now the market is sick and not functioning properly,” Connell says. “At some point, the fever breaks. We’re still not 100 percent, but we think it will function properly again.”

Connell advises investors to get involved in making decisions for their portfolio and not rely on what they’re reading or hearing on the news. Use your own research by keeping a log of how your investments have performed over time so you can review it periodically and proactively make changes to adapt to the lean times.

You have to decide when you need your money, and if it’s not for 10 years or more then invest accordingly, Connell says. But if you need cash in the next few years, you shouldn’t keep that portion of your portfolio in the market.

He recommends investors consider this question: “Ask yourself, if you had everything in cash right now, what would you do?” If the answer involves changing your allocation, then do it. Don’t hold onto positions once your goals and time horizon have changed.

“People say, ‘I just can’t look anymore,’ but now is the time you have to look and work through the fear of locking in your loss.”

Rediscover your career passion

In March, the U.S. unemployment rate hit its highest level since 1983, and people are beginning to see and feel the effects of layoffs.

If you have already been laid off, Howard sees an opportunity to rethink your vocation.

“If you’re mid-career, your level of self-awareness of your strengths and weaknesses is developed, plus you know all the areas where you can make money.”

He separates career satisfaction into three areas: red, yellow and green. If you are working in yellow, you have a gift, but no passion. Green is the ultimate goal — you have the gift and the passion, and red is the job you want to avoid — the one where you have neither the gift nor the passion.

Typically people know when they’re in the wrong job altogether, or if there are parts of their job that they abhor, because they are drained of energy at the end of the day. A forced job hiatus might provide the boost to explore career options that would put you in the green.

Taking a volunteer position in an area you’re passionate about may be an opportunity for networking while you “test drive” a new profession, he says.

If you’re not one of the pink-slipped, Cunningham says, make sure you beef up your emergency fund and consider putting in more than the typical three to six months of living expenses. “The rule of thumb used to be that you should plan to be out of work one month for every $10,000 you earned, but that was back in the day,” she says. “Now we have it hitting home that we have to save more. People have gotten that financial wake-up call.”

Re-examine your relationship with money

Finally, Howard exhorts people to rethink their relationship with money and keep it in perspective.

“When I do financial seminars, I ask participants to make a list of five moments of joy in their lives. Hardly ever does a thing pop up. What pops up most is ‘time spent with family on vacation,'” he says. “Life doesn’t consist of things. Life consists of relationships and what we accomplish.”

Howard offers three steps for financial success:

  1. Give something away — even if it’s just $5 to the Salvation Army. “There are people who are in need. Go out and find them and give them some. You’ve already made a conscious decision that you can do without.”
  2. Save something.
  3. Live on what’s left.

Says Howard: “If you adjust your lifestyle to fit within what you can afford after you give and after you save, you may not be wealthy, but you’ll be financially successful.”

Do you have a story to tell us about how you’ve found an upside to the down economy? E-mail us.