What If the Consumer Economy Never Comes Back?

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How to Manage Your Personal Finances in the New Economy

How to Manage Your Personal Finances in the New Economy

In much of the news coverage of the “Great Recession” over the past few years, many people have used the phrase, “When the economy recovers.” It’s a given for many of us that somehow, someday, our economy is going to go back to “normal” and people are going to start spending money again.

But what if the economy doesn’t recover? According to a recent article in the New York Times, there is no “going back to normal.” This is the new “normal.” America’s economy was propelled for almost 30 years by consumer spending, consumer credit, and home equity debt, and the driving forces that made this situation possible are no longer in play.

Consider these sobering facts from the article:

  • American consumers are on track to buy 28 percent fewer cars in 2011 than in 2001.
  • Sales of ovens and stoves are at their lowest level since 1992.
  • Americans’ “discretionary service spending” (i.e. restaurant meals, entertainment, education, insurance and other categories) is down 7 percent – more than any other time in history.
  • Walmart’s CFO has mentioned that Walmart customers are buying smaller packages at the end of the month – a sign that these families are literally running out of money each month.
  • The U.S. unemployment rate has risen 5 percentage points in the past four years.

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The U.S. economy has entered a classic “chicken or the egg” scenario – consumers don’t want to spend money because they feel insecure about their jobs and instead, want to save more money to recover from the losses to their retirement savings and their housing values inflicted by the recession. But businesses don’t want to hire more employees because consumers aren’t spending money, making it more difficult for consumers to feel confident, since there aren’t enough jobs. It’s a vicious cycle.

What should people do in case the economy doesn’t go back to “normal”?

How can you protect your family’s finances and come out ahead, no matter what happens with the economy?

  • Strengthen your job security: Do whatever it takes to become indispensable at your job. Take extra training, volunteer for extra assignments, build relationships with co-workers and supervisors, and offer new ideas to save money and improve efficiencies. We can’t control what happens to the economy, but we all have some level of control over how much effort we put into our jobs.
  • Get an emergency fund – now: Don’t wait any longer. Most financial experts advise that every family should have at least six months of cash savings – enough to cover a full six months of expenses after taxes. More is better. If you do happen to get laid off, it might be a long time before you find a new job that pays as well as your current position. If you already have six months of emergency cash, save more. If you don’t have a six-month cushion, start today.
  • Don’t panic: Try not to worry too much about economic news. There’s an old saying: “All news is economic news, and all economic news is bad.” Instead of worrying about the latest indecipherable movements in the global financial markets, focus on the things you can control. Enjoy your relationships with family, friends and loved ones. Participate in your community.

In the end, America will likely be better off in the long run because of what we’ve gone through in the recent recession and what some are saying is the start of another recession. Our country will be more disciplined, less reliant on debt and creative financing, and more focused on production and investing instead of merely buying and consuming the things that other people make.

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In the meantime, it’s likely to be a bumpy ride. Instead of wishing for a return to “normal,” perhaps we all need to adjust our expectations and find new ways to get by in the “new normal” of the U.S. economy.

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