How The Economic Crisis Challenges Our Financial Beliefs

By Silicon Valley Blogger on 8 March 2009 (Updated 30 May 2014) 10 comments

As the economic crisis deepens, I'm seeing more people beginning to challenge the conventional wisdom espoused in personal finance.  This economic recession is now in its 15th month, and is pegged as the third longest slump since World War II.  From my neck of the woods, everyone I know has either been laid off, or is afraid of the prospect of joining the ranks of those already unemployed.  And many more are worried about how business has slowed down drastically over the last 6 months.

I'm one of those people who is wondering where the stock market bottom is, and furrying my brow over this recession, as my own business has been impacted by the vagaries of this slowdown.  I get the shivers every time my eye casually flits upon the stock market numbers that are displayed on my favorite news page or when I read about how the market just broke through its latest support level on the downside.  How much more of your nosediving portfolio can you bear to watch?

Given how financially difficult things have become for so many, I'm starting to notice more and more people questioning the tenets of solid personal finance, at least the way I've come to embrace it.  Here are some of those widely accepted rules that are now being questioned.  Have you noticed your favorite personal finance blogger having a change of heart lately?

Personal Finance Theories and Tips Under Siege

Which personal finance teachings are being put to the test right now?

1. Build an emergency fund.  Cash is king!

Is your emergency fund big enough? For those of us working to save for a rainy day, I'm now wondering whether the standard six months of living expenses is enough to cover us comfortably.  When faced with a painfully long recession as the one we're having right now, I've become more convinced that we need much more than six months' worth of expenses in a safe and liquid high yield savings account.  But it depends highly on your personal situation.

With layoffs the norm right now, the emergency fund has become the bastion for so many families currently living on unemployment checks.  Those who are able to receive unemployment benefits, which provide 26 weeks of monetary coverage based on where you live and your original pay, plus an extension (of seven weeks for a total of 33 weeks) may have to worry less than those who are not eligible, such as business owners like myself.  So how much should you stash in your liquid account?  Note that there are numerous ways to build an emergency fund, including the possibility of using forms of credit and non-traditional sources of funds (like a credit card or a HELOC) that I know many folks rely on, but these are solutions I personally wouldn't undertake because of the risks involved.  Personally, I expect my emergency savings to cover my family for 18 months, a relatively lengthy period which I've chosen to fit my personal circumstances and comfort level.

2. Stay the course, stay put, and buy and hold.

Why is it that most investors don't make money in the stock market? Because they engage in market timing and own non-diversified holdings. Nevertheless, I'm seeing more and more investors and talking heads proclaim that the buy and hold strategy is passe, that market timing is now the way to go and that we need to prepare for a new financial era that isn't going to be conducive to long term investing.  A lot of market traders are now capitalizing on the new economic environment to sell their ideas.  Now I think there may be some room in our investment education for stock picking, technical analysis and stock charting tools (for a small portion of our portfolios), but I'd be careful to completely change course simply because of temporary market conditions.

It's unfortunate that this market environment is letting people learn the hard way, that equity investing is not for them.  My biggest advice?  Whatever you do, try not to act on emotion.  Market timing and trading are not for the faint of heart, so be wary of these approaches.  If you insist on timing, then do your due diligence and proceed with care.  For those searching for some guidance on this matter, here are some thoughts I have on the best places to put your money at this time.

3. Earn an income through your job.

Over time, I've realized that relying on one source of income comes with its own set of risks.  If you live in a town that relies on one industry to support its citizens (e.g. Detroit), you can be very vulnerable to heavy downturns like we have now.  It's a wise idea to develop diversified income channels, possibly through online activities, alternative investments, freelancing, moonlighting, and entrepreneurial projects that may help support your cash flow needs. 

I used to depend largely on my equity investments to supplement my cash flow, but with the market down, it's one more channel that's drying up.  Hence, I've been investigating various business and investment opportunities as ways to develop income sources that may help me face tougher financial realities, now that it's become quite clear that working on one lifelong corporate job just isn't that secure.

4. Why rent when you can own your own house?

The American Dream of owning a house may not be all that.  Now that we're experiencing a severe housing recession, this dream has become an American Nightmare for a great number of homeowners.  The upside down mortgage is now a brutal reality for so many.  So should you rent vs buy a house? Make sure you evaluate your options before you commit any money at this time, although acting like a real estate contrarian in today's buyer's market may pay off in the long run. On the other hand, at the rate things are going, I believe that renting for the long term may not be such a bad idea after all!

5. Should we spend our way into an economic recovery?

Obama's stimulus package details strongly emphasize the government's goal: to get the nation to spend.  Many of us have parked our stimulus checks in online bank accounts and money market funds.  Yet our government is telling us to spend the money to help jumpstart the economy.  But doesn't that go against what's best for ourselves?  Shouldn't we be using our stimulus tax credit to pay down our existing debts and to build our savings?  Clearly, our financial obligations are to ourselves first.  But if we so happen to help our economy along the way, then all the better!

With the nation undergoing such a serious economic crisis, so much of our financial theories and personal financial beliefs are being sorely tested, along with our tenacity and resolve.  But we can certainly thank this experience for helping us learn a lot more about finance and the value of risk management, which are especially valuable lessons for those who still have time to make up for losses.

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Guest's picture

Silicon Valley Blogger,

I think we are now learning the difference between knowledge and wisdom, between common sense and common action.

You could have posted this list 2 years ago, and everyone would have said these were common sense, and move on with their lives. Now they understand the difference between understanding common sense, and acting with common sense.

-Nate

Guest's picture

These are all things we should be thinking about more closely. Analyzing them, what's right for us, as opposed to just worrying about them and panicking. Thanks for the great post!

Guest's picture

One positive thing to come along during these times is that more and more people are placing a heightened importance and focus on personal finance strategies that work for the long term. It really is causing people to think twice about their strategies and spending patterns, and directing them toward more frugal methods. Once the economy adjusts to this, then it may not adversely affect the big picture as much as we may think.

Guest's picture
lucille

The idea that your 401k is your safe savior for retirement has been blown out of the water. Many plans have lost a big amount of their value.
I am glad to see more people viewing their jobs as not being a secure relationship. Jobs have not been secure for well over a decade. In many ways the traditional job is less secure because you have so much invested in it and most people have nothing else waiting in the wings.

Guest's picture
Against Theft

There is nothing new under the sun.

It has been known for thousands of years that when you loan money (as you do when buying stocks), sometimes people don't pay you back.

It has been known for thousands of years that spending more than you earn is bad.

It has been known for thousands of years that stealing is wrong. When you spend other peoples' money without their consent, that's called stealing, theft. When you spend the money of people who haven't been born yet, you can't get their consent. A society based upon theft does not work.

It has been known for thousands of years that when kings and governments debase their currency as we are doing with the inflationary printing of dollars, their countries fail.

I don't understand how millions of Americans can self-delude so completely as to ignore basic facts that have been known for thousands of years.

They deserve what they get.

Guest's picture

I agree that our first financial responsibility is to ourselves and to future generations, who, as has been said here in the comments, cannot give consent to assume our debts. I can't fault anyone for using any stimulus money to pay down debt or for savings. We are bolstering our savings by redirecting our extra principle payments into our emergency savings, which was already funded with 6 months of expenses.

That said, I think there is room for people to spend whatever extra money they have on sound investments such as additional insulation for their homes, or other durable items that will continue to pay dividends year after year, such as gardening tools, etc. I believe we can spend *some* money in ways that help ourselves and help the economy too. But I think the permanent growth and easy credit model of economics is dead. We're throwing good money after bad trying to revive it. Our "recovery" is never going to return us to those times. Nor should it.

Guest's picture
Franklin Grimes

I've never really trusted the government or the economy. When the economy tanked here in CT back in the 90's I lived in all the "boom towns" around the US and never saw anything that was very reassuring. I save my money, I beleive in co-housing, which you look at it makes alot of sense, and starting a organic gardening growing operation in my backyard, sell art-work, do odd jobs on the side. This melt down just reveals what I've alway's felt, America is a scary place to live where the government has no accountability to the populous and even less competency. You know, if you've ever been shipwrecked your going to keep supplies of food and water under your bed, in your car, ect. People should learn some lessons from this. If the government doesnt get it's act together itr's going to relearn some lessons. Anyone remember Ruby Ridge and Timmy McVeigh? Those people took to the woods when the economy went bad back in the late 80's and 90's and came back with a Ryder truck full of high explosives. Timmy learned how to handle TNT in the Army in the first Gulf war, which only lasted 20 day's? I wouldnt like to see what happens when some of the dis-affected veterans of this current conflict get pushed to the wall. Anyone remember the Whiskey rebellion? Those disgruntled Revolutionary War veterans, denied their pensions, almost took down the young nation. So we'll see and hope things improve soon, I guess.

Guest's picture
Sam

I think in these economic climates you have to look after your own assets. If you are worried abuot your job or even if you need to have more cash learn how to make money online or from home to either subsidise your income or as your full income. There is plenty of opportunity through affiliate programs, surveys, paid reviews. Give different things a try and start to earn money today.

Guest's picture

All the points mentioned above are definitely causes of concern for many people. How you deal with them is important as it determines if you can overcome your issues successfully. Some people choose to be frugal and change their way of living at a sudden. Whereas others change their habits gradually and hope for the best outcome by adapting to their new techniques of dealing with a recession.

Guest's picture
Guest

Very nice informative post. The economy is not to good now