Personal Finance Advice

Personal finance is about so much more than how much money you bring in every month or how much interest you pay on a credit card. Personal finance is also about psychology. How your mind is wired has a lot to do with how you spend your money. Do you impulsively buy things you don’t need when you’re feeling upset? Do you find that you’re less apt to keep your checkbook balanced when you’re in the middle of a personal crisis? Do you sometimes get the urge to buy something merely because someone you admire has the very same item? Obviously, personal finance is about a lot more than mere numbers.

Because money can be a complicated issue, it isn’t difficult to make the assumption that how people spend money says a lot about their state of mind. A man who is innately insecure might spend a great deal of money in an attempt to impress the people around him. A woman who is fearful of not having control may hoard cash away as a tool of comfort. Addiction ties directly into personal finance topics quite easily when you begin to consider this question:

What is the thing you think you need every day, regardless of the state of your finances?

In other words, what is your vice? Do you have to have a mocha latte every morning? Do you smoke cigarettes? Do you need a glass of wine every night before heading off to bed? Or, more importantly, do you consistently do these things whether or not you actually have room in your budget for it?

Vices don’t have to be things you consume. Some people pay for an expensive gym membership that truly stretches their budget thin, while others perpetually remodel their home at the expense of a home equity line of credit that is quickly getting maxed out.

How do you shed your vice? First, recognize your vice for what it is. Yes, a mocha latte is a pick-me-up, but you can make a similar drink at home for a fraction of the price. Yes, it’s nice to have a membership at a fancy gym, but you could do the same exercises at a less expensive gym or even at home.

Once you figure out that you’re spending too much for something, figure out how to stop. Treat this like an addiction recovery, even if it’s something as simple as buying shoes. Unless you convince your brain that it’s important for you to stop spending your money on whatever it is you’re into, your brain isn’t going to send up the warning signals the next time you reach for a pack of cigarettes.

Once you can convince yourself on a psychological level that it’s time to scale back on your spending, you have a better chance of keeping your budget in order.

Recent economic data shows only a slight slowing in consumer spending but those numbers are misleading.  Higher prices are to blame for this, so while Americans may be spending the same amount of money, they are getting much less for their dollars than they did a year ago.

While some of it’s inflation, the weakness in the dollar also plays a large part in this because of the American consumer’s propensity for purchasing imports.  With the Fed forced to slash interest rates to cope with the growing credit crisis, the situation is not expected to improve anytime soon.

Americans are feeling the strain, especially in states like California and Florida.  With foreclosure rates at three times the national average, the housing bust has hit these regions especially hard.

Consumer confidence is at the lowest its been in years and we aren’t even technically in a recession yet.  People are having to spend a larger percentage of their disposable income on necessities like food and energy, whose prices have soared over the last year.

Many retailers are struggling as more and more Americans grow worried about inflation and job security.  While the economic stimulus package will provide a little relief, it is becoming increasingly unlikely that we will be able to spend our way out of this economic downturn.

While a lack of liquidity in the credit markets are providing a natural break in spending, many Americans are also tightening their belts with the prospects of recession on the horizon.  Consumer spending has slowed considerably over the last few months and it’s having a noticeable effect on the economy.

It is unfortunate that it takes this kind of situation for people to finally start thinking about saving money.  The amount of debt we have in our society is ridiculous.  For many people, their idea of budgeting is the limit on their credit cards.  The government is no better with the national debt at $9 trillion and rising.

It can be difficult to save money in our over commercialized society.  We are being constantly bombarded with marketing spam at every level, when you watch television or surf the web, we even get it from text messages on our cell phones now.

As ridiculous as it sounds, the current economic climate actually seems to encourage more debt.  Rising inflation and low interest rates greatly favors debtors rather than savers.  This can be misleading however, since our economy doesn’t exist in a vacuum.  With the dollar falling to record lows, the relative wealth of our economy compared to the other nations of the world is taking a serious beating.

It is really the savings rate of a society that builds up wealth over time for an economy.  Over the years, our society’s savings rate has dwindled and the accumulation of debt has grown to epic proportions.

As much it would help the economy for us to spend our way out of a recession, is that really the best thing for us as individuals or as a society?  Debt and credit can be powerful tools to help leverage your financial situation, too much of it however can be disastrous.  You need only look to our highly leveraged financial system to see how that is working out now.