economy – Living Well on Less

Good news: the recession really is over

Karen — Wed, 22 Sep 2010 20:06:21 +0000

I’ve seen lots of posts in the blogosphere with tongue-in-cheek responses to yesterday’s news that the recession is over.

“Unemployment is still high.”

“The housing market is still in a slump.”

“People are still struggling.”

“What do you mean the recession is OVER?!”

Take heart: when an economy is actively in recession, it means economic activity is slowing down over a period of time. It was months and months after the start of the recession before economists finally looked at the numbers and said, “Whoa. We’re in a recession, guys.” And the announcement that it’s “over” comes over a year after its official end — which economists say was June 2009.

Now based on the numbers, the economy has stopped shrinking. Things may still feel pretty bad out there, but the news that recession is over means one thing: it’s getting better.

Does that mean things are going to turn around overnight? Absolutely not. After a recession this bad (the worst since the Great Depression), it takes time for everything to be okay again. And unfortunately, the economy is rebounding particularly slowly this time.

Historically, the economy takes years to rebound back to previous levels after a recession. Since this recession has been so deep, it makes sense that things may not be “good” again for a while. Since 1945, the average economic recession has lasted 10 months while the average economic expansion has lasted 57 months (source). That means it takes, on average, over 2 years for the economy to peak again after an average 10-month recession. This recession lasted 18 months, which means it will probably take a little longer than average for things to go back to normal.

But this really is good news. It means the worst is (hopefully) over.

In the meantime, try to keep looking on the bright side. This, too, shall pass. And when it does, we’ll all be armed with all of the frugal tricks we learned during the tough times to help safeguard us from future economic downturns.

Credit card companies are watching your purchases

Karen — Wed, 15 Jul 2009 12:00:38 +0000

While I don’t recommend using credit cards to rack up debt, the unfortunate truth is that maintaining a credit history can be an important part of good finances. After all, your credit history is what determines interest rates and credit-worthiness for even “good” debts like mortgages and (sometimes) car payments. Even if you have a zero tolerance policy when it comes to all debt, your credit history can affect your car insurance rates, job search, and your ability to rent an apartment.

As the economy worsens, credit card companies are looking for excuses to cut spending limits or close accounts. Both of these actions can negatively affect your credit history.

Even if you’re a responsible credit card user, you may be using your card on monthly purchases or charging things just to maintain your credit activity and avoid account closure. Well, it turns out credit card companies could be watching even responsible purchases to weed out users who they deem a poor risk.

Last week, I read an interesting article outlining the top 10 purchases not to make on a credit card. According to the article, credit card companies are watching statements closely to look for “red flags” that may indicate borrowers are in trouble. The most surprising item on the list: bargain shopping. It turns out that using a credit card at a bargain store like Wal-Mart signifies to credit card companies that you may be in financial trouble. Also on the list: tires and other big ticket necessities, marriage counseling, and income taxes.

I don’t know about you, but we’ve definitely charged big ticket items like tires or plane tickets on a credit card just to keep the account active. Even though we have the cash, we make the purchase with a credit card to keep the account active and rack up rewards points, then pay it off immediately when the statement arrives. I had no idea that could lead credit card companies to take action that could negatively affect my credit score.

To me, this is just another reminder of why credit cards stink. On the one hand, they’re necessary to build and maintain a good credit history, but I absolutely hate being at the mercy of a credit card company even now that I don’t carry any consumer debt.

Money saving habits wreaking havoc on your health

Karen — Tue, 14 Jul 2009 12:00:05 +0000

Last week I wrote that frugal eating habits are also healthy eating habits. Since Tony and I restricted our budget even more, we’ve experienced a ton of positive health benefits, including weight loss, increased energy, and better sleep. It’s really made me start thinking about the balance between frugality and good health.

The truth is, it’s possible to take it to the extreme and practice unhealthy habits by trying to save money. As with other aspects of frugality, maintaining good health on a frugal budget requires balance. Here are some money habits that may be wreaking havoc on your health.

Cheap processed food

It’s no secret that fast food is cheap and convenient. Sunday paper coupons and sales can help you purchase processed foods at the grocery store for next to nothing. But at what cost? The recent documentary, “Food Inc.,” highlights the dangers of low-cost foods, and why they’re making the nation overweight and unhealthy. I haven’t seen the movie yet, but I do recommend avoiding “cheap” food. Instead, shop smart for fresh foods, buy produce when it’s on sale, and always strike a balance between food cost and good nutrition.

Avoiding health care

When our budget was at its tightest, we did the unthinkable: we lived for a year without health insurance. Dumb. The truth is, private health insurance isn’t nearly as expensive as you think if you’re young and relatively healthy. My husband’s costs $148 a month. Even if you have health insurance, you may be avoiding the doctor to avoid paying co-pays. Skipping checkups, refusing to visit the doctor, or ignoring health problems to avoid health costs is not a smart way to save money. That $20 co-pay could turn into thousands in medical bills if you’re not treated promptly.

Skipping exercise

Don’t make the mistake of thinking you have to pay for a gym membership to get active. I’ve found that $20 a month for gym membership is well worth the cost, but you may not be able to fit even $20 a month into your budget. If that’s the case, check out an exercise DVD from your library, go for a jog, or take a bike ride. You don’t need to spend money to get in shape.

Stressing about money

I’ve said it before: frugality is about improving your quality of life. Putting yourself under constant stress about money can lead to a wide array of health problems. If you find yourself obsessing about money because of your frugal habits, take a step back. Remember that the whole point of being frugal is to live a healthier, happier lifestyle by reducing the amount of stress you face about money.

Why I’m using credit cards again

Karen — Tue, 21 Apr 2009 12:00:42 +0000

Tony and I have been credit card debt free since January of this year. But for the past couple of months, we’ve started using our cards again every month.

Don’t worry, it’s not what you think. We still don’t carry a balance, and we probably never will again. But we also don’t want to leave our credit cards with a zero balance for longer than a month or so right now.

I’m sure you’ve heard about credit card companies reducing credit lines or even closing unused accounts. By not using your zero-balance credit cards, you may be targeting yourself for account closure.

As much as I hate that it works this way, your credit history is tied pretty strongly to your credit card history — especially if you’re like me and you’ve never had a car loan or a mortgage.

I opened my first credit card at 18 years old. I didn’t open another one until I was 23 years old. If my first credit card account was closed, it would shave 5 years off my credit history. Since length of history is a factor in determining your credit history and score, it’s likely mine would take a big hit.

Even though we plan to live as debt free as possible, I’m not against the idea of holding a mortgage or another car loan someday. If I want to get a low interest rate, though, keeping my credit history healthy is crucial.

To ensure that my accounts stay open, I’m using them a little bit here and there. Using credit cards at all can be a little dangerous, so I’m very careful to set boundaries.

I never use them to purchase things that I want, only regular needs that I would be spending money on regardless (gas, groceries, and other necessary purchases).
I pay the balance as soon as I receive the statement.
I budget for these purchases just like any other purchase. This is crucial. I’m not using my credit cards to sidestep my budget. They’re just another way to pay for regular purchases.

It’s definitely a hassle, and I wish we could get away with not using them at all. But unfortunately this is a reality of our current economy. I want to protect my credit history and credit score so that when we’re ready, we can qualify for a low interest rate on our mortgage or (maybe) car loan.

Photo by andresrueda

Living in “poverty” on $500,000 a year

Karen — Tue, 17 Feb 2009 12:00:34 +0000

I know I’m a little late with this, but I haven’t had a chance to write about it until now. As part of the stimulus bill, banking executives won’t be able to make more than $500,000 a year. The New York Times ran a sympathetic article on Feb. 6 explaining the hardship executives will face due to this pay cut.

Among the “necessities” that bankers will struggle to afford on their lowered salaries:

$45,000 a year for a nanny
$16,000 a year for two vacations
$240,000 a year for a summer house
$75,000 – $125,000 for a chauffeur
$65,000 for private school tuition

Not to mention the inflated yearly costs of housing and lifestyle, as well as other “necessities,” like a few designer gowns a year for charity galas. (Side note: there is, of course, no mention of a yearly allowance for charitable donations.)

I’d like to say the reporter was being facetious. Unfortunately, that doesn’t seem to be the case:

“As hard as it is to believe, bankers who are living on the Upper East Side making $2 or $3 million a year have set up a life for themselves in which they are also at zero at the end of the year with credit cards and mortgage bills that are inescapable,” said Holly Peterson, the author of an Upper East Side novel of manners, ‘The Manny,’ and the daughter of Peter G. Peterson, a founder of the equity firm the Blackstone Group. “Five hundred thousand dollars means taking their kids out of private school and selling their home in a fire sale.”

Sure, the solution may seem simple: move to Brooklyn or Hoboken, put the children in public schools and buy a MetroCard. But more than a few of the New York-based financial executives who would have their pay limited are men (and they are almost invariably men) whose identities are entwined with living a certain way in a certain neighborhood west of Third Avenue: a life of private schools, summer houses and charity galas that only a seven-figure income can stretch to cover.

So, you see, even the absurdly wealthy are living paycheck-to-paycheck, and we’re supposed to be feel sorry for them because they’ve gotten so used to the luxurious life that they’ll no longer be able to afford on a half million dollar salary. Give me a break.

Many of the people facing lay-offs are worried about whether they’ll be able to feed their children and keep their modest homes. They were already living on $50,000 a year or less, but now their yearly income is half that. You’re telling me I’m supposed to view these bankers as victims because they might have to give up their bi-annual vacations?

To me, this is a prime example of people with too much money and no ability to look outside their own sheltered bubbles. Give. me. a. break.

Just for fun, I’ll also share this post from the Consumerist — their suggestions for how CEOs can cut costs and survive at $500,000 a year.

Do you know where your money is going?

Karen — Thu, 29 Jan 2009 12:00:19 +0000

One thing I’ve learned from the mortgage and lending crisis — you can’t be too familiar with the terms and conditions of your loans, investments, and credit cards.

Now that we’re facing a credit crisis, it’s more important than ever that you’re familiar with the policies of your lenders and investment firms as some institutions are making changes to their policies.

Take some time this month to educate yourself on where your money is really going and whether you’re getting the best deal.

Banking

How much interest are you earning on your savings and checking accounts? What are your options for increasing your interest rate? (Consider moving your savings to ING Direct for a 2.5% interest rate.)
Are you paying monthly fees for your accounts? If so, it’s probably time to switch banks. There are many banks that offer completely fee-free accounts.
How much do you pay for ATM fees and other transactions? You may be surprised to find out how much you’ve been spending on certain transactions.

Credit Cards

Is your account still open? Some credit card lenders have started closing dormant accounts, so if it’s been a while since you used your card, check and make sure it hasn’t been closed due to inactivity.
What is your interest rate? This may have recently changed, so check your statement or call for the most current information.
What is your credit limit? It also may have recently changed, so make sure you know exactly how much it is. A lower credit limit can affect your credit score.

Investments

How much are you paying per transaction? If your fees are high, consider investing in lump sums less frequently to make the most of your fees.
If you’re paying high fees, consider moving your investments to no-load mutual funds through discount brokers or investment firms.
Take some time to check out the prospectus report for your investments. Is it time to change your portfolio?
How much time do you have until retirement? If you’re planning on retiring in 5 years or less, it’s time to move your investments out of the stock market and into low-risk bonds. If you’re young, now is a great time for stock market investments because prices are low and you have plenty of time for the market to rebound from its current state.

Mortgages and other loans

Are you eligible for refinancing or consolidation? If your credit is good, now might be a good time to consider refinancing for a lower interest rate.

It can be a pain to track down this information, but it’s worth it to know where you stand. Not only is it important to know where your money is going, but it’ll give you a chance to determine if you’re getting the best rates, fees, etc. As long as the market continues to fluctuate, I suggest you take stock of your finances every 3 months to make sure nothing has changed.

One perk of the shrinking economy — everything else is shrinking, too

Karen — Tue, 16 Dec 2008 12:00:53 +0000

photo by Mr G’s Travels

As the stock market crumbles and the job market shrinks, it’s easy to see the negatives of the troubled economy. After all, they’re right in front of us every day on the news, in our friends’ and neighbors’ struggles, and in our own homes.

Despite all of this, I can see one upside — America’s obsession with bigger and better seems to be waning out of necessity.

We’re all looking for ways to downsize:

Smaller houses are becoming the new trend instead of huge homes that cost a fortune to buy and maintain.

Economic and environmental concerns are leading smaller, more fuel efficient cars to overtake gas guzzling SUVs and trucks in sales.

Consumers aren’t just downsizing for big purchases, though. They’re also using more coupons for grocery shopping and eating out less to downsize grocery bills.

Though gas prices have sharply decreased in the past month or so, we’re still driving less.

I hate that more people are struggling with job loss and home foreclosures, but I love to see people spending smarter, conserving resources, owing less and saving more.

Though I know that these trends correlate with the struggling economy, I hope that newly frugal people will take away some valuable lessons from their new frugal habits. Though unnecessary spending will most likely surge again when the economy bounces back, I hope the memory of these uncertain times motivates people to at least save more and live within their means — even if they are spending more than now.

What would we do in a financial emergency?

Karen — Thu, 04 Dec 2008 12:00:14 +0000

Yesterday Kacie at Sense to Save wrote about what she would do in a financial worse case scenario like a job loss or sudden medical expenses. I’ve actually been thinking about this a lot lately. Unfortunately, an acquaintance’s husband recently lost his job, and it made me wonder if we’d be prepared for a similar situation.

Our emergency fund is nowhere near complete. We actually only have enough to cover us for about a month and a half. Yikes. But we’ve only been working on it for about four months, and we plan to make it a top priority in the coming year.

Obviously, just as Kacie suggested in her post, the first thing to go would be discretionary expenses (cable, entertainment, cell phone extras, etc.) Our budget is pretty bare bones already, but cutting discretionary spending would probably free up $250 or so max. That’s easy enough.

But what if that wasn’t enough? What then? I think it’s important not just to have a plan for financial emergency, but also a plan for financial catastrophe.

For us, it would mean putting my student loans back into forbearance (a lender-approved pause in repayment that wouldn’t negatively affect my credit score, but still leads to interest accrual). That would free up another $200.

Next we would consider downsizing to a smaller apartment. We currently live in a 2-bedroom because we like the extra space (a 1-bedroom can get a little cramped with two people and a dog). We considered downsizing last summer, but then our landlord offered to renegotiate our lease and lower our rent. We decided it wasn’t worth it after we crunched the numbers (including a $300 loss for nonrefundable security deposits) and considered the hassle of moving and living in a smaller apartment.

In an emergency we might try to get out of our lease or find a subletter. Moving to a smaller apartment could save us another $200 a month.

Until we have a 6-month emergency fund in place I consider it a priority, but if we had to choose between saving and eating, I’d be willing to cut back temporarily.

With all of those expenses cut, we could reduce our spending by about $1000 a month. Wow, that would make a huge difference. Of course, it would be uncomfortable. But there’s no room in the budget for comfort in times of extreme hardship, is there?

Finally, in the event of an extreme emergency, Tony would drop out of grad school and find a full time job. He’s currently paid a stipend to teach, but it’s much less than he’d make in a full time job (if he could find one in this economy).

We might even consider packing up and moving back home where we have a support network. That would be an absolute last resort if we had no other options. Tony only has about 18 months left in his program, so I’m hoping nothing too extreme happens before he finishes. :)

How about you? What’s your plan for financial emergency?

The most important financial decision you’ll make this year

Karen — Tue, 04 Nov 2008 10:00:42 +0000

Looking on the bright side: Benefits of the economic crisis

Karen — Tue, 21 Oct 2008 14:00:07 +0000

The news has been scary lately. Crazy stock market plunges and surges, rising unemployment, and an unstable global economy make this a very scary financial market for average consumers. The news can’t be all bad, though, can it? There has to be a bright side to this craziness, right?

In an effort to stay positive, I’ve come up with five hidden benefits of the economic meltdown. Even the worst rain clouds can have a silver lining.

1. People are healthier in times of economic crisis.

No, really. According to a New York Times article from Oct. 6, people take better care of themselves in a bad economy. Studies suggest that people are more likely to engage in unhealthy, dangerous behaviors like excessive drinking, eating unhealthy food at restaurants, and overworking themselves during times of economic prosperity. People cooking more at home and spending less on things like alcohol during economic crisis, so overall well being improves.

2. Gas prices are lower.

As the stock market falls, so does the price of oil. According to an article at CNNMoney, gas prices have fallen 30% since the summer’s peak price. That means you’re paying less for your daily commute, which equals more money in your pocket for things like groceries.

3. Less travel and consumption is good for the environment.

Despite falling gas prices, consumers are still cutting back on unnecessary driving. Airlines announced yesterday that they’ll be cutting down on flights in the coming holiday months, which means higher ticket prices and less travel. While this may sound like bad news, it’s actually good for the environment. Less driving and traveling means less fossil fuel burned.

Consumers are cutting spending, and less consumption equals less waste. It’s bad for the economy and the retail industry, but good for the environment.

4. Desperate retailers offer better bargains.

Discretionary spending has dropped in the past year, but that means retailers are working harder to get your business. I’ve noticed a lot of great deals and lower prices at many stores in the past few months as they fight to drive more sales. With experts predicting dismal holiday sales, the bargains will probably continue through the Christmas season. Take advantage of the bargain prices, and you could end up saving on your holiday shopping.

5. People are paying closer attention to their finances.

During times of economic prosperity, a lot of people put their finances on autopilot. When you have plenty of money, there’s not as great a need to pay attention to what you’re spending. People are also more likely to spend on things they don’t need when the economy is doing well.

In the past few months, there’s been a surge in interest for good personal finance habits. People are paying closer attention to where their money is going by budgeting and tracking expenses. They’re also looking for ways to cut spending with frugal habits like couponing, shopping at thrift stores, using the library, and making fewer unnecessary purchases. It’s a shame that it takes a worldwide economic crisis to get people to pay closer attention to this stuff, but I’m glad to see it happen.

What other benefits have you seen from the economic slump?