Friday, October 10, 2008

Avoiding the Credit Crunch

You know what I've come to realize? The Government's financial parenting skills are poor.

In an attempt to bolster the economy and help more people acquire the American Dream, it has managed to help business and the people together create a spending bubble that has now burst.

Low interest rates is the biggest culprit of the bubble. The attraction of buying not only houses, but appliances, cars, and almost any other major purchase with low interest rates or deferred interest has made the material mindset of the average American unrealistic. Top all of that off with the availability of credit cards to almost anyone 18-years-old and up, you've put spending before saving.

Not to mention the low interest rates that people receive in normal savings and money market accounts. For the modest income earner, saving reaps little benefit, in terms of interest earned. The best online money market accounts earn as little as 3% per year. Low interest on purchases means low interest on savings. Where do you think the government and business is trying to point your money?

Into 401k and IRA accounts. They want you to save money for retirement, but not for now. But if you're not working for a company that supports 401k plans, you'll have trouble achieving those long-term goals.

And while I preach, I'll tell you a bit about my situation. My family stretched for a house that was just above our budget. We could not have afforded such a house if it was not for low interest rates in the mortgage market. But now we're already borrowing - albeit very small amounts - from ourselves every month to pay the bills. Some of our big expenses include a used luxury SUV and a luxury health club membership. We also have no-interest financing on an HDTV and a quality outdoor gas grill. We are living beyond our means. We are fortunate that my wife's industry is not as affected by the economic downturn as others; we can look forward to advancements in her career - and are banking on it.

For now, I have canceled the health club membership, at least until next summer. After paying off the TV and grill in November (the balloon payment to avoid any interest charges) I will not buy anything until we have saved up for it. I would love a new front load washer/dryer set; My wife's '02 luxury convertible (that we own outright) has become impractical but we'd have to finance a new car. I've only played golf maybe five times this year. My wife has eliminated designer clothing purchases. I've been looking for quality used toys for JD on Craig's List. We are keeping my SUV because we only have a little over a year to pay it off and it only has 40,000 miles. I can drive it for years to come, maintain it, let JD and hockey beat it up, and then in the future we'll hopefully have the money to replace it.

And that's the attitude that I'm trying to take. Do what my parents encouraged early on. Parents are always encouraging their kids to save up for the things they really want. I know you want that action figure, but aren't you saving up for that bicycle for next summer? My Dad said something to me that I'm just now heeding: Live cheap; accumulate wealth.

Will that attitude hurt the economy? Well, you tell me what hurts the economy more - limiting spending or people losing their homes. Maybe we'll have to lose some of the big-box stores and get back to smaller retail outlets. You'll have to wait a couple of weeks for the store to order the exact model appliance you want. That attitude might get manufacturers back into the US, to allow for more custom and Just-In-Time ordering.

Finally, when you're considering that new appliance or other major purchase, consider whether or not you have the money. If you're thinking about financing it, think if you can live without it for the time that you planned on paying for it. Then, take that $50+ per month and get that lousy 3% interest. You'll be better off financially. Better yet, the stress of paying an obligation will be gone. You'll owe nobody and true ownership is true happiness.

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