Brace For a Difficult 2009

2008 was been a rough year for all of us, and 2009 doesn't look much better.
Millions of Americans have already lost their jobs - few industries have been safe from the plague of cutbacks among ailing businesses struggling to survive.

Investors who've built up their life savings, their retirement funds, and their kid's college tuition through years of hard work and discipline have watched hopelessly as the value of their holdings plunge by 40% or more from just over a year ago.

Homeowners thought the path to prosperity meant taking the same road that too many others took - buying a home during a real estate boom that soon revealed itself to be a bust - and are now stuck in a home that's probably worth significantly less than the mortgage they are obligated to pay back. And the sad news is that the housing correction isn't over yet - the Congressional Budget Office reported earlier this week that they believe the average national home price has another 14% to fall before bottoming out in mid-2010.

It doesn't seem to matter if you've been careful in taking on new debt, only bought a house you could afford, invested carefully after thorough research, or chose a career in a secure field. The nation's economic mess may still trickle down to punish you for your responsible actions. But if you've let your debt get the best of you, it's imperative that you get a hold of it as soon as possible or things may get ugly very quickly.

Our economy thrives when citizens are in debt.
The government is working hard on passing a plan to help prevent an economic disaster from spiraling out of control. But we can't count on the government to save us. Many of the three to four million jobs they plan to "save or create" won't even materialize until 2010 or 2011. And to do that, they're going to add to the unbelievable $1.2 trillion deficit, which could easily reach over $2 trillion once Obama's American Recovery and Reinvestment Plan is put into action.

Our government may be able to print more money, devalue the dollar, and add to the record level of national debt when they need more cash. How else can they recover our economy from the reckless actions of top executives who operated under little regulation and with little common sense?

But the government's not spending their own money - it's all coming out of the taxpayer's pockets, whether our tax dollars or our children's future tax dollars. We, the common folk, have to be much smarter with our finances. We can't print cash without risking some serious jail-time, and we can't expect someone else to pay for the debts we run up.

And you can bet there won't be a government bailout for troubled consumers. Sure, for troubled banks, troubled automakers, and a troubled insurance giant - but not for the consumers those companies rely on. Never mind that huge companies have done business in their own haphazard way. It's our job to manage our finances responsibly, even if the bigwigs of the business world don't know how to put those three words together in a sentence. Manage finances responsibly.

The days of being in debt and driven by greed have got to go. Acquiring the bling, keeping up with the Joneses, and the false image we like to portray as we drive a shiny new car every year - what does it all mean? It means that many Americans are up to their eyeballs in debt as they give in to the "buy now, pay later" mindset. But the part where you "pay later" may prove to be difficult if the nation's economy and the job market continue to decline, and it's likely that they will.

Our economy thrives when consumers take on debt and spend, spend, spend. A top issue in Washington is "getting the credit flowing again." Why, so consumers can take on more debt? Sure, the vast majority of us can't buy a home, a car, or pay for a college degree without some help in financing. Credit is needed by nearly all of us, to some extent. But credit is over-used by many, to a severe extent.

The use of credit has changed over the years.
I remember when my neighborhood grocery store first started taking credit cards many years ago. I had forgotten my checkbook, and before I swiped my card, I looked over my shoulder to make sure no one saw me use a credit card. I was actually embarrassed about it at the time - to me, using a credit card for groceries meant that I didn't have the cash to buy basic necessities.

Since then, credit cards have evolved to offer numerous perks, rewards, low teaser rates, and balance transfer options. For someone who plays their cards right, meaning that they pay the balance in full each month and avoid all finance charges, credit cards can be smart money management tool. But for someone who doesn't play their cards right, it may mean they are struggling to even make the minimum payments on their long list of maxed-out credit card balances.

Credit cards are also accepted nearly anywhere these days, and the convenience of using a credit card is unbeatable. I went to buy my son a drink from a vending machine the other day and was initially disappointed when I realized that I had no cash on me. Then I noticed that the machine had a credit card reader. Of course, I always have my trusty credit card with me and was able to buy my son a drink. My point is that we, as a society, have grown so dependant on credit that vending machine owners know they'll miss out on profits if they don't accept credit cards for a $1.50 item.

And our relationship with credit is almost emotional in our modern world. Didn't you feel a little special when you were approved for your first loan, or your first credit card was upgraded to a rewards card or a platinum card? Card issuer's ads like to remind us how great life can be when you use their card. And some have taken those ads literally as they attempt spend their way into happiness.

Time to wake up.
But the reality is beginning to set in now that we've experienced first-hand what can happen when times turn difficult. After taking a beating in the mortgage market, banks are reining in credit limits because they fear many of us are at risk for default and they want to limit their losses. And I don't know about you, but I've hardly received any credit card offers in the past year - banks know that many American consumers are in over their heads and they just can't afford to lose more on a risky bet.

It's true that the economy will take longer to recover if you spend less, hanging on tighter to your cash and your credit cards. The banks will lose interest income and take longer to recover from their bad business decisions if you pay off your credit cards immediately and refuse to charge more than you can pay off each month. And sadly, more businesses may close their doors and more Americans are likely to lose their jobs, but we have no other choice if we want to stay on top in these difficult times. Unfortunately, it's the price we have to pay.

It's time to get your finances in order. It may be easy to put it off when times are good, assets appreciate, and credit is easy. But now, you can't afford to put it off any longer. It's especially important to consider worst-case scenarios to make sure all your bases are covered.

Are you spending less than you earn each month?

Are your high-interest debts paid off? Low-interest car loans, student loans, and home mortgages are okay if they easily fit within your budget.

Do you have an emergency fund saved? Experts often recommend three to six months of living expenses, but times like these may call for at least six months.

Are you able to save in a bank account or contribute to an IRA or 401(k) regularly?

If you can say yes to all this, that's great! Our economy needs you. Shopping is good.

If you can't say yes to all this, then start working on it right away. Our economy needs you to be a financially secure consumer. Shopping is good when you can afford it.