Now that the recession has eased its grip on the economy, many Americans are starting to see the light at the end of the tunnel. But financial counselor and bestselling author Eric Tyson warns we shouldn’t view the uptick in the economy as a pass to return to our pre-recession bad habits. He offers advice to help us stay on a healthy financial track.
Hoboken, NJ (February 2012)—For many Americans the recession was a wake-up call. Whether a family member lost a job or we just lived in fear of such an event, we tightened our belts, cut out the extras, and started saving a bit (maybe not as much as we should, but at least we were moving in the right direction). But now that the economy is (ever so slowly) picking up, that trend seems to be reversing itself. Savings rates are dwindling, and consumer spending has been steadily rising…making it pretty clear that, collectively, we’ve fallen off the frugality wagon.
Personal finance guru Eric Tyson says while it’s tough to generalize—after all, everyone’s circumstances are different—this frugality fall-off squares with what most of us instinctively know about human nature.
“People have short attention spans,” says Tyson, author of the bestselling Personal Finance For Dummies®, 6th Edition (Wiley, 2009, ISBN: 978-0-470-50693-6, $21.99) and several other financial books including Investing For Dummies®, 6th Edition (Wiley, 2011, ISBN: 978-0-470-90545-6, $21.99) and a personal finance expert who is known for his reasoned and objective advice. “Now that the initial shock of the recession has passed, some folks seem to be returning to their old ways. The problem, of course, is that the economy is far from booming—and even in the best of times most Americans don’t make great day-to-day financial decisions.”
As a rule, says Tyson, we save too little, spend too much on unnecessary “stuff,” and just don’t put enough conscious thought into how we use our money.
“It’s not that all discretionary spending is bad,” he clarifies. “We enjoy spending money and that’s okay, as long as we’re also meeting long-term financial goals. The problem is that too many of us spend mindlessly on things that don’t yield an ROI that’s worth it. It’s true that many of us started paying a lot more attention to our spending when the recession first hit…but now we’re starting to backslide.”
If you want to stay on the wagon—or climb back on if you’ve already fallen off—you don’t have to go to extremes, says Tyson. There are some relatively small adjustments you can make that, together, make a significant difference.
Ask yourself truthfully: Did the recession reveal any holes in my family’s financial plan? It could be that one spouse lost his or her job (revealing the need for life insurance or a health plan that’s not tied to a job). Or it brought home the need to have an emergency fund. Or perhaps it woke you and your spouse up to the fact that you weren’t going to be able to retire when you previously planned.
“Step One is finding these holes in your financial plan,” says Tyson. “Step Two is making the necessary changes to bridge these gaps in your long-term financial outlook. You may need to make cuts in one aspect of your spending in order to put more money toward an emergency fund. You may want to look into different healthcare plans, such as a health savings account. Or it might be time to take a serious look at your retirement savings strategy: Could you be doing more to prepare?
“If you make the right changes, you may look back at the recession as a good thing because it pushed you to make better choices regarding your financial future,” he adds.
Get clear on your family’s long-term financial goals. (And realize you can’t pay for everything.) For instance, Tyson says it’s unrealistic for most parents to fully fund their children’s college education. This is especially true considering the escalating cost of higher education. It’s best for the average family to focus on funding Mom and Dad’s retirement account and to realize that kids will have to rely on scholarships, financial aid, and loans.
“Explain this reality to your kids early on and let them know they need to set themselves up for success by doing all those things that colleges find appealing—getting good grades, participating in extracurricular activities, and so on,” he advises. “It’s actually a great opportunity to teach your kids what good financial management looks like. It’s not just saving money here and there. It’s about making good decisions in all aspects of your life.”
Extreme approaches only set you up to fail. Make doable changes. Be real about it: You’re probably not going to spend several hours a day couponing. Nor are you likely to live with no TV at all.
“What you might do is find a less expensive grocery store where you consistently shop, or trim your cable bill by cutting extraneous movie channels you rarely watch,” suggests Tyson. “The idea is to make changes that don’t disrupt your whole life or zap it of all happiness.”
Do everything possible to control healthcare costs. Healthcare costs continue to increase to astronomical levels, and it’s only going to get worse. Even if you get your health insurance through your company, there’s a good chance you are (or soon will be) paying a higher percentage of the monthly premium than ever before. (And of course, those premiums are rising.) If possible, says Tyson, ask your employer and/or shop around for better/less expensive options such as HSAs, FSAs, and so forth.
HSAs, for instance, are very helpful when tax time comes around. These accounts allow you to save on a tax-free basis toward current or future unreimbursed medical expenses. If you get sick and haven’t met your deductible, the funds in your HSA can be used to pay it off. Once your deductible is paid, your insurance plan will kick in and cover any subsequent medical costs under your policy, but your HSA can still be used to pay for your co-pays and any non-covered healthcare expenses. Single people can contribute $3,100 to an HAS, and families can contribute $6,250. That means depending on your status you can reduce your taxable income by $3,100 or $6,250 in a given year.
“And controlling healthcare costs is not all about health insurance,” says Tyson. “There’s a lot to be said for doing everything possible to stay healthy: eating right, exercising, and kicking bad habits like smoking. Of course, we can’t control everything, but we can treat our health like it’s the most important asset we have—because it is.”
Bite the bullet and do some research to cut your monthly expenses. No one wants to spend their valuable free time checking on lower auto insurance rates or better cell phone plans. But when you consider the potential payoff, you’ll be more willing to invest a couple of hours in doing Internet research and making phone calls.
“We put off these dreaded tasks and just keep paying inflated rates,” notes Tyson. “But if you can save, say, $500 or more a year, it’s definitely worth your time to shop around a bit. Do the math and use that to justify the effort.”
Don’t let technology suck up all your money (and time). Between watching TV, Facebooking, endless texting, and so forth, we’ve gotten brainwashed into thinking a) we have to be constantly entertained, and b) we need the latest and greatest electronic gadgets. Unfortunately, these twenty-first century revelations aren’t good for your bank account or family togetherness.
“As it is, most of us struggle to find quality time together given work obligations, long school days, and other activities,” says Tyson. “At home, all these technology choices compete for attention and often pull families apart. The cost for all these services and gadgets adds up, leading to a continued enslavement to our careers.
“Err on the side of keeping your life simple,” he advises. “Trade in your family’s smartphones, and the costly plans that come with them, for regular phones. And then put in place a no-phones-at-the-dinner-table rule. Go for basic cable instead of one of the more expensive plans and start having a weekly family game night away from the TV. Making these and similar changes costs less, reduces stress, and allows more time for the things that really do matter in life.”
Resist the urge to overindulge kids. Make no mistake, kids are expensive. The U.S. Department of Agriculture estimates it will cost nearly a quarter of a million dollars to raise a child born in 2010 (and that’s not counting college). But whatever you do, don’t add to that price tag by spoiling kids, says Tyson.
“They don’t need the latest technology, expensive summer camps, pricey clothing, lavish parties, and so forth,” he insists. “When you keep these things to a minimum, not only will you save money but you’ll raise non-materialistic kids with good values and well-developed financial management skills of their own.”
Eat healthfully at home without spending a fortune. All the restaurant bills add up fast. Plus, they tend to be bad for you (especially fat-laden fast food meals). Plan a little better and you won’t find yourself going through the drive-through out of desperation. On the other hand, if you are cooking most of your meals, don’t use that fact to justify overspending on groceries. “Eating in” is not carte blanche to go crazy at the supermarket.
“Try to keep a healthy inventory of groceries at home,” suggests Tyson. “This will minimize trips to the store and the need to impulsively dine out because your cupboard is bare. Try to do most of your shopping through discount warehouse-type stores, which offer low prices for buying in bulk, or grocery stores that offer bulk purchases. And if you’re trying to eat fresher, healthier, and organic foods more often, buy more of what is currently less expensive, stock up on sale items that aren’t perishable, and buy more at stores like Trader Joe’s that have competitive pricing.”
Don’t waste money on brand names. Be suspicious of companies that spend gobs on image-oriented advertising. Branding is often used to charge premium prices. Meanwhile, blind taste tests have demonstrated that consumers can’t readily discern quality differences between high- and low-cost brands with many products.
“Question the importance of the name and image of the products,” says Tyson. “Companies spend a lot of money creating and cultivating an image, which has no impact on how their products taste or perform. This is especially important to keep in mind when you’re grocery shopping. Most of the time the ingredients are the same in store-brand products as in the brand-name product (and may even be made by that same company). You don’t need to shell out money to pay for the name.”
Skip the vacation this year. Going to the beach for a week or to Disney World is not an entitlement. These kinds of vacations are very expensive. If you can’t afford them, you can’t afford them. The truth is, says Tyson, there are plenty of activities you can do near home that are just as fun as going away somewhere—at a fraction of the cost.
You can take a week off and explore your own city: There may be zoos, museums, gemstone mines, historic sites, and so forth that you haven’t visited in years (or ever). You can go hiking or camping in a local wilderness spot. Or visit relatives you rarely see who have an unfamiliar lifestyle—if you’re a “city mouse” family, spend a few days on the farm with Great Aunt Bertha.
“When you drive for a few hours, you still have that getting-away-from-it-all feeling but without the huge price tag,” he says. “And since you didn’t invest a lot of money, you won’t feel compelled to wring every ounce of ‘fun’ out of your allotted time—which, ironically, can be stressful. You’ll be able to relax and enjoy yourself.”
Stick to tried-and-true investment vehicles. Stock market fluctuations have a lot of people worried about investing. Is it safe? Tyson has said it over and over again for years: 401ks and IRAs based on respected mutual funds are best.
“Don’t chase trendy investments like gold,” says Tyson. “In my years as a financial adviser and a columnist answering many readers’ questions, I’ve seen the same, avoidable mistakes being made over and over. Often these investing mistakes occurred for one simple reason: a lack of investment understanding. People didn’t know what their investing options were and why particular options were inferior or superior to others.
“Everyone can take advantage of an excellent investment vehicle: mutual funds—the best of which offer you diversification, which reduces your risk, and low-cost access to highly diversified portfolios and professional money managers, who can boost your returns with less risk,” he says.
Keep money from going down the drain (or out the window). Look for ways to save on energy costs. Adding insulation and weather-stripping, installing water-saving devices, and reducing use of electrical appliances can pay for themselves in short order. Many utility companies will even do a free energy review or audit of your home and suggest money-saving ideas. If it’s time to replace an appliance, investigate energy efficiency before you buy appliances or even a new home.
“Get the whole family in on the effort to make your home more energy efficient,” suggests Tyson. “Have a contest to see who can remember to turn off the lights or other electronics most often or who can reduce how much water they use daily.”
Pay attention to how much your car is costing you. By doing basic maintenance such as oil changes, you can add years to the life of your car and get better gas mileage. What’s more, if you’re accustomed to buying a new car every few years, it’s time to change that mindset.
“A car is a tool, not a status symbol,” reminds Tyson. “I strongly recommend paying cash for your car rather than financing. By keeping that goal in mind, even if you ultimately fail, you’ll be more likely to have saved a nice down payment and you’ll buy a more economical model.”
It can’t be said too many times: If you have to charge it, you don’t really need it. True of everything from consumer goods to vacations to cars: If you can’t pay cash, you can’t afford it.
“Resist the lure of 0-percent-down financing and credit cards that make too-good-to-be-true offers to get you to sign up,” advises Tyson. “Credit cards offer temptation for overspending and carrying debt from month to month. If you absolutely must use credit, replace your credit card with a charge card. A charge card, like the American Express Card, requires you to pay your balance in full each billing period.”
Focus on “the best things in life”…remember, they’re free. When you focus on spending lots of quality time with friends and family, you won’t feel the need to fill the void in your life with costly distractions.
“Instead of thinking about life in terms of what things cost, start thinking about it in terms of time,” says Tyson. “Often, all those unnecessary things we buy for ourselves and our kids are simply distractions from the people we love. They send the message that it’s necessary to spend a lot of money in order to have a good time. It’s not, of course. The best things in life—friends, family, quiet evenings at home just being together—really are free. Sometimes it’s good to be reminded of that.”
“Not feeling in control of your financial destiny takes an emotional toll,” says Tyson. “When you don’t have a handle on your finances, you experience increased stress and anxiety. Don’t allow yourself to fall back into the poor financial habits you had prior to the recession. Be diligent about making sound financial choices and you are certain to be a happier person. Financial literacy helps you sleep easier and truly savor the rare times you’re not working hard—instead of fretting over the money that’s sliding through your hands.”
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About the Author:
Eric Tyson is an internationally acclaimed and bestselling personal finance book author, syndicated columnist, and speaker. He has worked with and taught people from all financial situations, so he knows the financial concerns and questions of real folks just like you. Despite being handicapped by an MBA from the Stanford Graduate School of Business and a BS in economics and biology from Yale University, Eric remains a master of “keeping it simple.”