Week Ended 7^th October 2011

Quote of the Week:    "It is better to be careful a hundred times than to be killed once." Chinese proverb

The persistent increase in the cost of living this year has made economic conditions particularly difficult both for individuals and households. If prices keep rising without a corresponding increase in incomes, we may be forced to radically alter our personal budgets and even financial goals. However, one of the things that we may need to uphold, and not change, is the need to keep on saving. 

The irony is, we actually need to save more during periods of high inflation. If you are still not convinced, here are a few reasons why saving, especially during tough financial times, is very important:

For liquidity

You need a certain amount of cash just to cover your regular expenses. It is not only recommended but almost necessary to have several different savings avenues to fund various expenses. Preferably, you should aim at having a well-padded emergency fund and a retirement account. In addition to these standard savings avenues, you should also consider having an account for recurring expenses. 

For major purchases

A major purchase such as a house, car or household appliance can be a distressing hit to your finances. Budgeting and saving for the purchase can often ease the pain. The way to go about it would be to first identify the purchase you want to make and estimate what it may cost. You can then determine the most desirable time that you may want to make the purchase. 

For preparedness

The pace at which prices are rising will eventually start slowing down. In periods of economic uncertainty, we are exposed to various financial risks such as job loss due to downsizing, business losses due to low revenue levels, or even a rise in the cost of living that may be beyond our current incomes. To ensure that one is financially prepared for the ‘worst-case scenario’ it would be prudent to keep saving, especially when economic conditions improve, in an emergency fund. This will ensure that in the future if another period of tough economic times comes up you will be well prepared to weather the storm. 

Conclusion:

The prevailing economic condition may be compared to the proverbial cloud with a silver lining. We all know that every cloud does indeed have a silver lining; and during tough times, it may be the opportune time to differentiate between who gets the cloud and who gets the lining. Those who get the cloud are the ones who ignore prudent personal financial practices, while those who have embraced sound money rules which they follow religiously get the silver lining. The silver lining is a better deal, and no one wants the cloud.

Ultimately, the simplest and most effective way to beat down the effects of inflation is by being committed to your budget. This means you need to have control over how you spend your money. This would involve clearly defining essential and nonessential expenditures, always spending within your means, avoiding credit where possible, and most importantly, reviewing your budget periodically. Remember also that the first rule of budgeting is ‘to just do it’.

In order to make a budget it must be written down, on paper and on purpose. Writing down everything you spend and every source of income creates a much more accurate,  detailed account of where your money is going. This will significantly smoothen the sailing during the tough times and ensure that one does not succumb to the stress related to harsh economic conditions. Difficult economic times usually force us to be frugal which although is like an involuntary crash course on “budgeting during hard times”, it should be seen as a blessing in disguise since it can make us acquire permanent habits that will enable us improve our financial positions once the tough times are gone. Therefore, although it is not easy to remain committed to personal financial goals during tough times, we should learn from this experience and make the most of our finances once we are back on our feet again. It is interesting to note that the generation that made the USA an economic powerhouse in the later part of last century learnt the importance of being frugal after watching their parents going through terrible financial anguish during the great depression of 1929.               

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