One of the big stories during the recession that followed in the aftermath of the global financial crisis was that more and more people were cutting back and turning to frugality. Faced with financial setbacks, like reduced hours and job loss, as well as the disappointing fact of over-leverage, many consumers cut back on their spending and started reforming their habits.
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Following on the heels of decades of consumption by the majority, and by the idea that everyone could appear rich, frugality seemed novel and exciting. However, as the economy takes tentative steps toward recovery, and as frugal fatigue starts to set in, many people are starting to spend more, returning to the habits rampant prior to the financial crisis.
What’s Wrong with Spending Money?
Of course, there’s nothing inherently wrong with spending money. However, many of the habits that consumers followed prior to the financial crisis resulted in a low savings rate, and spending beyond their means so as to be in large amounts of debt.
While spending money doesn’t have to be the end of the world, it does begin to matter when you repeatedly spend on things that aren’t important, or if you live beyond your means, and neglect to save for a rainy day. The reason that many people cut back in the wake of a global financial meltdown is because they were forced to by circumstances. If you don’t want to find yourself in a position where you are forced to choose between two important expenditures, it’s vital that you look for ways to cut back now.
Smart Spending No Matter the Economic Conditions
What it comes down to is this: If you want to better weather financial setbacks, you need to engage in smart spending no matter what else is going on. This doesn’t mean that you have to cut back on every little expense all the time, but it does mean that you should make an effort to identify ways that you could spend less right now. Especially if you are in a good position.
The time to adjust your spending and your lifestyle is right now, particularly if things are going well. Take a look at your financial priorities. Are there things you are wasting your money on? Are you spending money on things that you don’t really want? Many of us spend because we feel like we “should.” We want to keep up appearances, or we think that someone our age should have something. Focus in on those things, and stop spending money on them.
It’s also a good idea to figure out if there is a better way. Could you borrow instead of buy? While doing something yourself isn’t always the best plan, there are some things you can do on your own to save money and get ahead financially. Make these changes now, so that you can set aside money for a rainy day. You’ll build up an emergency fund with the money you save, and when crisis strikes, you won’t have to alter your lifestyle as much. This can make the whole situation much more bearable.
Know Your Priorities Now
Even if you don’t cut back on everything (you still have to live a little), you can still be better prepared for a financial setback. After re-vamping your finances so that you are spending and saving smarter, you should prioritize the rest of your expenses. Which items are most important to you? Which are least important? Have a plan to cut the least important items from your budget if the economy should turn bad, or if you should run into your own personal financial emergency. When you are prepared to cut the least important things from your budget, and when you have a plan in place to keep up with the most important expenses, you are less likely to fall apart in a difficult financial situation.
None of us like to think that our finances could fall apart. However, as we’ve seen recently, financial setbacks can come at any time. We’ve seen economic problems, natural disasters, and rapidly rising health care costs in the last five years. All of these difficulties, and many more, can lead to financial ruin — and you never know when something will strike you hard. As a result, it’s vital that you look ahead. Make a plan, and consider your options. Prepare now, and you’ll be in a better position later.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.