How To Keep Our Thrifty Habits After Frugality Loses Its Popularity
Americans have short memories like goldfish, and the same thing is true about American investors and savers. With unemployment at its highest level since 1983, more people have been squirreling away money in rainy day funds and other investments recently. The recession, unemployment, and dwindling 401(k) plans have had everyone scared to spend much money. But, now that the recession has seemingly turned a corner, we will see a reversion to our old ways of spending more and saving less very soon. We can see it already in the personal savings rate that peaked earlier this year at over 6%. Currently the savings rate is at 4% and dropping. Our new found love of frugality will soon be dead.
Home values have begun to stabilize, and they will soon be increasing once again. The stock market has been on a tear lately, and the days of a Dow Jones Industrial Average under 10,000 seem to be behind us. The unemployment rate is the only missing ingredient. Mark my words now, when unemployment finally reaches 8% or lower next year, Americans will be calling their mortgage lenders in droves trying to get a home equity line of credit so they can flip their house.
But it does not have to be that way. Frugality does not have to be the 2009 buzz word that no one remembers in a few years. We can keep our good saving and investing habits if we choose to.
How do we keep up our newly found good habits?
Make Savings Automatic
Making your savings automatic will keep you from fooling yourself that you can get away with a smaller emergency fund than three to six months of living expenses. Saving automatically makes it hard to stop saving. It is like inertia. That is one of the principle reasons that many companies are now starting to automatically enroll their employees in their 401-k plans. Once you start saving, you forget that the money is leaving your checking account, especially if it leaves your account every month automatically. By keeping up with your automatic savings plan, you can continue to save for the next recession that will once again blindside us down the road.
Keep Track of Your Spending
When times are good, we fool ourselves into thinking that we can spend more than we earn without saving up for our purchase. This kind of thinking gets us away from paying for our purchases in cash, and we rely more on the use of credit cards. We may also think that our job is now more secure than it once was because the economy is improving. If we only learned one thing during the past downturn, it was that our jobs are not as secure as we originally thought they were. Now is not the time to jump back into our old spending ways. We should continue using our monthly written budgets and monitoring our spending behavior.
Diversify Your Investments
If you have a diversified portfolio, you will be better positioned to ride out the rough patches in our economy when it goes up and down. When your investments take drastic hits because you may be over weighted on one area or another, you are more inclined to sell your investments at inopportune times. Then, you could find yourself like many investors lately who are not invested in the market during the upswings.
People tend to forget how bad things were during the good times. Usually that psychological factor is a blessing in disguise, but when it comes to your money, it can be a curse. With the stock market roaring lately, many of us are starting to forget how rocky the road was this past year and are getting back into bad money habits. Our lack of personal savings is creeping back, and our spending is starting to increase. But, you can prepare for the next financial crisis or even the next recession that may be on the horizon by not forgetting the lessons learned in this one. Frugality may be dying, but it doesn’t have to go the way of the dodo bird just yet.
This is a guest post from Hank who writes about personal finance and investing on his blog, Own The Dollar. You can also check out his RSS feed to see his latest posts or follow him on Twitter.
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