Tuesday, November 18, 2008

SURVIVING THE ECONOMIC MELTDOWN

SURVIVING THE ECONOMIC MELTDOWN - A Personal Perspective

Note:  This entry was originally posted on November 18, 2008, during the darkest days of our economic meltdown.  At the time, it seemed that everything was falling apart and there was no way out for many Americans.  Times have changed and things are getting marginally better.  However, I think a lot of the lessons we learned from 2008 were valuable ones.  They certainly were for me!

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The economy is in the tank, that is for sure. While I haven't yet been severely affected by the downturn yet, other than to see my investments shrink by about 20% (isn't that enough?) I have had to cut back on spending recently.

Before the Real Estate market melted down, I sold out and cashed out. This was a good thing. However, it meant I had to pay 15% Capital gains tax, as well as State tax (6%) on the sales of my properties. If you've owned a property a long time, and taken depreciation deductions every year, you can end up having a higher capital gain than you take out in cash. And sometimes this means that you can end up with more owed in taxes than you have cash on hand. Ouch.

So this year, I have to tighten the belt a bit and cut back on spending to pay off the old tax bill. I know, you really, really feel sorry for me, right?

But, being "Mr. Stingy" I took this as a challenge. Personal Finances can be like a game sometimes, and it is fun to play - and win. But how to cut expenses further when I have already cut expenses to the bone?

Well, here's some more "Stingy" ideas:

1. Check your insurance policies: I found that my local agent had not been giving me discounts for multiple policies, for good driving, for airbags, etc. In addition, I found that he had tacked on unnecessary coverage (rental car, etc.) to the policies. I dumped health coverage (I already have health insurance, and the $10,000 provided by the car policy is really very expensive coverage for what you get). I also raised my deductibles to $1000 (it pays to own your cars outright) and dumped collision and comp from one older vehicle. I started getting check after check in the mail from my agent. I also made sure that collision coverage for seasonal vehicles was dropped when those vehicles were not in use. I also shopped my plans with several other companies, but found my present agent's rates competitive. Total Annual Savings: Over $1200 a year. (Again, this fits right into the "rowboat" theory of plugging those leaks!).

Update: I have since switch my insurance to GEICO, and found their rates lower and the service better. I also reduced my uninsured motorist coverage as well. If your goal in life is to sue your own insurance company, uninsured motorist coverage is probably a good idea. But that is why it is so expensive - the coverage is a boon to personal injury attorneys and is priced accordingly. I many States it is not required at all, so consider whether you need it or not. See my article on "Understanding Auto Insurance".

Note also that poorer people tend to obsess on obtaining cradle-to-grave coverage on depreciating assets like cars and boats, but rarely insure the things that really matter. an umbrella liability policy and a term life insurance policy are a much better bet that a "stated value" policy on your Corvette. Your greatest risk is being sued, and your greatest asset is your income stream. What is parked in your driveway should not be the most valuable thing you own.

Update:  2011 - My insurance costs - for health, liability, car, life, whole life, disability, homeowners, etc. has dropped by a staggering $1000 a month or more.  Getting rid of disability coverage, converting life policies to "paid up" status, dumping collision, comp and other junk coverage, selling a house, the boats, etc. has cut my insurance bill by more than half.

2. Check Out Your Local Library: I used to go to the local chain bookstore and buy a half-dozen books, CDs, and DVDs, plopping down my credit card and coming away $200 to $300 lighter (plus finance charges). Later on, I'd be tripping over boxes and boxes of books. While the local library might not ahve every book you are looking for, you'd be surprised at what they do have. And let's face it, your local Borders or whatever has mostly the latest tomes from some quasi-famous person who is cashing in by "writing a book." Oftentimes, that sort of "literature" is less than satisfying.

Update:  2011 - we still use the local library.  Most books you could want are available on the library system and you can order them to be sent to your local library, which takes a week or two.   We have not visited a Borders in over two years and can see no reason to ever go back.

3. Wally Wal-Mart: Discount shopping outlets are doing well in the recent recession. While most retail outlets are reporting decreases in sales and profits, Wal-Mart is one of the few places bucking the trend. But be cautions about "discount" shopping. Places such as Dollar Store, Dollar Tree, and Family Dollar sell goods so cheap that they often are not worth buying. You are not "saving" money buying something that is so poorly made that it breaks soon after you purchase it. I was pleasantly surprised the other day to visit Wal-Mart and discover that they sell products other than melamine-laced dog food. Many name-brand products from "gourmet" stores are on the shelves there at almost HALF the prices. It is possible to save a considerable amount. The downside to shopping there is how the employees are paid and treated. And you do see some interesting customers there.

We stopped buying things like carbonated and bottled water, pre-sliced or pre-shredded cheese, or other pre-packaged goods, whenever possible. We've never been ones for frozen entrees, either, which cost more per serving. Cutting back on potato chips and snack foods is not only good for your wallet, but your health as well.

Update: 2011 - We continue to use WalMart as our primary grocery outlet and can see little reason to go back to Publix or Harris Teeter.  Many friends proclaim their status by saying they would never shop there - friends with incomes and net worths far less than our own.  Stupid, eh?  Pride goeth before the fall.

4. Doing Without: Even shopping at a place with lower prices, you can't "Spend your way to success" as many try to do. Spending to save money is like eating to lose weight. It is just the opposite of what you need to do. I found that much of what I was spending money on was really a lot of junk - and that at a certain point in your life, you become tired of possessing things. On a recent trip, I resisted the temptation to buy souvenirs or other non-essential items. I've never been much of a "shopper" so this wasn't too hard.

5. Paying Cash: One thing I've tried to do in recent years is to pay cash for purchases. I surprised a friend of mine the other day when I withdrew $700 from my bank's ATM (Note: I never pay ATM fees and neither should you!). He said "I never knew you could take out that much money at a time!" I generally take out enough cash to last a week or two to pay for expenses and groceries and the like. Oddly enough, having cash reduces the temptation to spend. With credit cards, paying for a meal or other item is merely a matter of swiping the card and maybe signing a slip. It doesn't feel like you are spending. But when you have to fork over hard earned cash, it makes one more cognizant that you are spending. Paying cash also helps avoid the credit card trap - keeping a running balance on a credit card and ending up paying revolving credit every month.

UPDATE: Using your DEBIT card is another good idea, and you can run this as a CREDIT card in most cases to avoid Debit card fees or having to enter your PIN. When run as a Credit card, you are afforded the protections that apply to regular credit cards. Just be sure to enter all your puchases in quickbooks daily!

6. Borrow Instead of Buy: A friend of mine came over to visit with their young baby. We needed a crib, a stroller, a car seat, and other toys for her to play with, as the parents couldn't carry all of it on the airplane. We bought a car seat for $40 (cheap enough) but the other items were quite expensive. We found that a friend with numerous grandchildren had loads of such baby items. Another friend at a local church that I had done some pro bono work for had set up a "grannies' closet" filled with child accessories and also other occasional use items (need a walker for a week? They've got it). For a small donation, they were happy to lend us a high chair. And when we return it, we'll donate the nearly new car seat to the cause.

7. Eating Out - Carefully: A lot of folks use local restaurants as a cafeteria or kitchen, eating out as many as 5 nights a week or more. They are so tired at the end of the day from bailing out that rowboat that they grab a bite on the way home, or say "Honey, let's just eat out" or they order take-out or pizza, often for considerable amounts of money. Not only is this expensive, it isn't healthy, as most restaurant food is quite high in calories. While it is fun to be waited on and catered to, eating in a restaurant, even a fast-food one, is the most expensive way to go about getting fed. But eating out should be more than just refueling the body - it should be about having a good time. In that regard, most chain restaurants and places where people view portion and price as the primary indicia are usually less than satisfying.

But rather than give up eating out all together, we've just tried to be smarter about it. For example, the local Hotel is far too pricey (and formal) for dinner. However, they have an afternoon "high tea" every day at 4:00 which is not well attended, but lavishly served. For a fairly reasonable charge, you can sit with friends for hours and have good food in great surroundings.

But entertaining at home is probably the best bargain. Most folks today find it too much work to clean the house, decorate the table, and then cook and serve a meal. But it doesn't always have to be on the host entirely. A good friend offered to cook an ethnic meal for us and our friends and asked to have the party at our house (as we have a huge dining room table). A party like that can help spread the labor around, and also the costs. For a lot less than eating out at some crowded restaurant, we could sit for hours and have a good time in good company. Who says entertaining is a lost art?

8. Slowing Down and Save Gas: The price of fuel has dropped way down as demand has slackened. This is a good thing for our economy. Using less fuel is not only good for your own pocketbook, it keeps demand down, which in turn drops prices. So don't go back to your old habits! On a recent trip, I used my car's trip computer to calculate gas mileage. Driving the way I used to (70-80 mph, rapid starts, etc.) I found I was getting about 26 miles per gallon. Making a game of it, on the way back, I tried to keep to at or below the speed limit and accelerated gently and tried to anticipate stops. My mileage rose to an incredible 36 mpg in some places and averaged over 32 mpg for the trip. Overall this saved about 3.6 gallons of fuel, which at the going rates (at the time) meant a savings of $14 for the trip. It would have been $28 if I had driven carefully both way. No, it's not a huge amount of money, but enough to buy lunch. And if you add that up, say, over a year's time, it could easily exceed a hundred gallons of gas. At $4 a gallon, that's $400 right there.

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These are just a few ideas I've had. You don't have to SPEND or waste a lot of dough to be wealthy. Wealth is a state of mind.

UPDATE:  The ideas we have discussed in this blog over the last three years have paid off.  We are living like retirees now, spending a lot less, but doing a lot more.   It has taken a lot of effort and also some re-thinking of our priorities, but it has been totally worth it!

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