5 Financial Principles for a Seismic Economy

Photo: James Jordan

The financial meltdown of the past three years begs for a new approach to money management and a reinvention of personal employment. The forces and broader systems that affect our economic lives are unpredictable and to large extent, not fully understood. How can average folks survive and thrive in the midst of what appears to be a sea change in our economic reality? How do we move away from a reactive ‘duck and cover’ response toward true empowerment? The 5 principles I embrace are old ones, slightly modified for the realities of an unstable job market and tightly interwoven national economies. They hearken back to other times when the future was clouded by uncertainty and life demanded a more active and nimble financial response:

1. Scalability

An uncertain financial horizon should inspire flexibility and mobility. So often I see young people embracing debt loads when times are good only to find themselves over-leveraged and in default when times turn rough. I’m tempted to admire the optimism in assuming salaries will only increase and careers will progress without interruption, but can’t recommend it as a sound financial strategy. Reasonably expanding your lifestyle during boom times should be tempered by the ability to easily contract it during lean times. This means keeping luxuries, luxuries…avoiding the temptation to turn them into a fixed overhead expense. Debts should be kept to a manageable level — at your full income or at half your income.

2. Vigilance

The days of choosing your 401(k) funds and then letting them ride for the next decade are over. It’s essential to actively manage all assets, keeping an eye on what’s working and not being afraid to make changes based upon information and reasonable analysis. The market will probably take care of itself in the long run, but that doesn’t mean you need to take every hit because someone told you “you’re a long-term investor; don’t worry about it.” Huge spikes and deep dives in market activity should rightly warrant our attention. There’s real validity in seeking financial safe havens during protracted times of market chaos.

3. Stay-Grading

Learning to be satisfied with a reasonable pace of progress is the hardest lesson for most of us to learn. We’re barraged with messages that promote upsizing and upgrading everything from our cars to our closets. If only we could so confidently and precisely predict the upgrading of our income. So, relax…arguably the greatest luxury is avoiding the sales pitch and its inevitable contract and debt load. Learn to embrace a novel concept that I like to call “stay-grading.” Reconsider that ‘starter’ home — maybe it can be your ‘finisher’ home too. Learn to love that white fridge — stainless steel just shows finger prints easier.

4. Broad-Sourcing

The US Department of Labor estimates that today’s student will have an average of 10-14 jobs by age 38. Some of those positions will be left voluntarily, some through down-sizing, out-sourcing, acquisitions, and contract-terminations. With few exceptions, lifetime stable employment is a relic of a different era. Isn’t it time we diversified our income stream like we diversify our investments? The reality of the employment landscape seems to compel us toward ‘broad-sourcing’ our incomes. Perhaps it could look like this: a primary job that supplies 65% of our income supplemented by two or three secondary positions that contribute the other 35%. Our employment energies could be divided and redirected where needed. We could respond to lay-offs and furloughs with less stress; we could see which piece of our “mini-conglomerate” has the most potential for personal joy and economic growth.

5. Independence

Dependence is a marketing strategy. The more we allow companies to suggest a void that they charge to fill, the more we concede our independence. Reclaim skills that have been eroded by services and convenience. Once upon a time, people washed their own cars, cooked their own food and managed (more or less) to keep themselves entertained. Not every activity in life needs to have a consumer exchange attached to it. Let’s resurrect bartering. Let’s embrace the concepts of ‘free’ and, ‘I did it myself.’

All is not doom-and-gloom, but if nothing else, the past few years of economic upheaval should sound an alarm that the old ways of earn-and-spend demand a critical review. When global economies are built on shaky foundations and questionable fiscal regulation, our response must be more deliberate, more proactive and frankly — smarter. New economic conditions call for new principles and a rethinking of old habits that were better suited for a different era. Let’s challenge ourselves to pioneer a strong, responsive and fiscally healthier ideal for the decades ahead.

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Guest's picture

What a great post. I was able to relate to all of the key elements but #5 Independence ranks #1 in my book. For the life of me I cannot understand why anyone would pay someone $35 or more to wash their car. I mean a bucket, soap and water and 10 minutes later you are all done. On a serious side, I do believe that it is important not to raise ones standard of living just because he or she received a raise or promotion. The current economic state of America should prove that a wise man is clever enough to save for a rainy day.

Guest's picture

I sometimes wonder why people, reasonably intelligent most of the time, frequently fall for the collective brainwashing that is going on in that 'spend, spend' is the only way forward. Have we become so blinded and self-deluding by what the marketeers tell us to do, that we fail, or worse, don't want to see , that if we spend more than what comes in is a sure way of waking up one day and blink at the negative position we find ourselves in ? I'm talking purely about consumer debt and not so much about mortgages ,although 'life-style inflation' creeps in there as well . Are we just too lazy (or immature) to realise that this isn't the way foward ?. And if one of the world's largests economies is for a large part based on consumer spending, what does that say about us and for our the future ? Have we come to except that we have no defence against the marketeers mantra that 'There is a sucker born every minute ' ?

Kentin Waits's picture

This has always intrigued me too. It's as if there's such a 'group think' going on that folks fall prey to the collective (elevated and sometimes ridiculous) expectations. It will interesting to see if the lessons we're learning from the recession will be permanent ones.

Guest's picture

Definitely that is a very great post. I am looking for this kind of post. I need those principles on my small business. I can now see the future of my business success.

Guest's picture

Great Article! I really like your first point about "Scalability", because so often we put ourselves into financial situations that work just fine when we are working and making our expected income, but throw something unexpected into the mix and all of a sudden our little hill becomes a huge mountain that we struggle to climb. There are so many factors that can affect our income, including health, relationships, changes in employment, family, and more, and we need to plan ahead for some of these emergencies. A little while ago I wrote a blog on "Preparing for Ups and Downs", when we aren't in a "scalable" situation. I suggest that people create an emergency savings fund that will cover approximately 6 months of living expenses, so they are ready for those unexpected situations.

Link to "Preparing for Ups and Downs" Blog: http://jaynsteele.wordpress.com/2010/03/16/preparing-for-ups-and-downs/