Personal financial management strategies during recession

Personal Financial Management During a Recession

Money management is always important but never more so than in a recession. In principle, the more earnings and certainty of income streams diminish, the more important it becomes to reduce any unnecessary expenses, avoid waste, and identify the best possible prices for all necessary expenses. A comprehensive strategy for individuals to conserve as much of their hard-earned money as possible includes distinguishing necessary expenses from discretionary expenses, identifying the best possible times for specific purchases, avoiding new dent as much as possible, buying generic products where they are comparable to name brands, buying in bulk, avoiding single-serving meals and other consumables, and conducting systematic price comparisons instead of making any purchases spontaneously.

Distinguishing Necessary and Discretionary Spending

The first and one of the most important steps in conserving finances during difficult economic times consists of identifying which expenses are genuinely necessary and distinguishing them from expenses that are purely discretionary and unnecessary. That does not necessarily mean that one must eliminate every conceivable expense that is not strictly necessary for living; rather, it means listing every known expense and then ranking them in order of importance. At the very top of the list are items that are the absolute "must" haves: rent, car insurance, transportation, medical care, tuition, course books, health insurance, and other similarly important items. At the very bottom are items that are strictly unnecessary such as new video games, spontaneous purchases, additional versions of clothes one already owns (such as a tenth or twentieth pair of shoes), and other purely recreational expenses such as movie tickets and eating in restaurants instead of preparing meals at home.

The middle of that list might include items that are neither strictly necessary nor wasteful, but that must still be considered discretionary (and therefore susceptible to elimination altogether) that can be either appropriate or inappropriate choices based on available income. For example, a monthly commercial gym membership is neither an absolute necessity nor completely superfluous. It provides a convenient way of maintaining fitness and is a wholesome recreational activity. However, it is a discretionary item than could, if necessary, be eliminated from the list of expenses because it is not strictly necessary and the benefits it provides can be duplicated by substituting cheaper alternative, such as working out at home or at the local YMCA.

Identifying Optimal Times for Purchases

There is an optimal time of year for making many types of purchases; often, theses schedules are dictated by holiday retail traditions and the economic and market realties affecting specific industries. For example, the best possible time to buy a new vehicle would be very close to the end of the year when many car dealerships are overstocked with the current year's model. Conversely, the worst possible time of year for the same purchase would be shortly after the New Year, when demand for the latest model is highest and supply the lowest. Naturally, most people who are trying to conserve money will not be in the market for a new vehicle, but this illustrates the point and it applies to many different types of consumer goods such as house ware, linens, clothes, and electronic goods.

Avoiding Incurring New Debt and Avoiding Negative Credit Entries

One of the principle reasons that the American economy was so vulnerable to collapse in the first place was the overwhelming extent to which Americans rely on debt financing for non-essential purchases. Generally, anything purchased by financing the cost through debt will cost much more than the same item purchased outright in full. The true cost of items purchased through financed debt is the base cost of the item plus the total amount of interest and finance charges associated with the choice to pay on time instead of all at once. Typically, consumers make decisions to purchase on time by considering only the retail price of the item and not the additional 25% or more that the purchase will actually cost them after it is fully paid. As a general rule, one should avoid purchasing anything on credit and simply wait until it is possible to save the full amount of the purchases price. The only time consumers hoping to conserve money should ever considering using credit to pay for expenses is in connection with items that fall on the highest places of the non-discretionary expense list: medical care and vehicle repairs to a work vehicle would be two examples.

Another closely related issue is maintaining a positive credit history. That is because in the event that it ever becomes necessary to rely on credit for necessary expenses, the finance rate (and therefore, the actual total price) of the expense will be dictated by credit scores. The higher the credit score, the less likely an application for credit will be denied and the lower the interest rate on the loan. Conversely, the lower the credit score, the more likely an application for credit will be denied and the higher the interest rate will be on any loan secured by credit. Since previous payment history (and especially late payments) are one of the most direct negative influences on credit scores, it is crucial to make all payment on time, even those (such as utility bills and monthly gym memberships) on time. One of the downsides of the modern age of connectivity is that virtually all financial obligations and payment patterns are incorporated into credit scores.

Reducing Reliance on Single-Serving Meals

One of the most overlooked sources of unnecessary expenses is reliance on prepared single-serving meals. Even a relatively inexpensive meal, such as at a local diner, costs as much as a few days' worth of meals that are prepared at home. Certainly, eating out is unavoidable sometimes; however, in many cases, eating out is a spontaneous choice or one made for social reasons rather than necessity. Likewise, almost any single-serving purchase (such as bottled water, soda, or a prepared sandwich) costs much more that the exact same items prepared in advance at home. One can save money by refilling containers with filtered water or even bottled water from a gallon container instead of purchasing a single-serving bottle for the same price (or more) than the cost of an entire gallon. Preparing a sandwich at home costs a small fraction of the same sandwich purchased from a delicatessen.

Effective Price Comparisons and Avoiding Spontaneous Expenses

Nowadays, the availability of the Internet makes it possible to conduct effective price comparison research from the comfort of home and without actually having to visit retails stores in person. Since almost any purchase can end up costing much more without such research, anybody on a budget should always make the effort to conduct price comparison research before making the purchase. One very simple but effective method is to check EBay first. Even before checking EBay, one should search for the item on a shopping database service such as epinions.com that provides an instant price comparison displaying the range of prices typically paid for any contemplated purchase. Whether for clothing, consumer electronics, or household supplies, almost anything purchased at the closest or most convenient retail location will cost much more than the best available price elsewhere.

Finally, anybody hoping to conserve money in a recession must avoid spontaneous expenses, whether at the grocery store or the mall. Purchases should always reflect what one actually needs and never spontaneous impulses to buy anything for which the consumer did not already have a conscious need in advance. Purchasing milk at the grocery store after forgetting to list it is one thing; purchasing a new pair of shoes at the mall "because they were on sale" when one already has a closet full of shoes at home is quite another matter.

Sources Consulted

Clark, K., Gibbs, L., and Poppick, S. "Three reasons to LOVE the slowdown." (28 Sep