Getting Debt Under Control

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Photo by: Corica

Always Have Some Cash

As the economic meltdown ensued, financial institutions argued that they were not having a crisis of solvency, they were having a crisis of liquidity. [1] While it very likely was a crisis of both, it points out the importance of having your value in liquid assets as well as the inherent danger of leverage.

So how are we a mini-version of the larger economy? The average person in America has the exact same problems as these huge banks. Their assets have diminished in value, and they’ve leveraged themselves (debt financing, credit, etc.) to get those assets in the first place. Unfortunately, most of us are not expecting much of a bailout, so what should this tell us?

When times are good, we all extrapolate our current success and live accordingly. We imagine that our well-paying job will last, so, of course, we can buy that big house; it’s just going to increase in value anyway. We can put all our investments in stocks, because they’re rising meteorically. Cash seems boring and unrewarding in such a market, but as those who have cash now can attest, it certainly is nice when things go the other way.

Advice For Saving

One simple rule can give you a method for ensuring you don’t find yourself in this situation again:

Live Below Your Means

This one rule will help you make rational decisions in your life. It’s a subjective goal, but it can make every decision the safest one. Unfortunately, much like the banks, while we should have adopted that policy before, it’s very hard to adopt now. If we’ve lost our jobs and are in severe debt, it’s very hard to live below those means. So for this time of crisis I think the rule can be re-summarized as follows:

Assume The Worst

Many of us are expecting a strong rebound, but are we sure it’s coming? If we continue expecting, we may find ourselves in a very precarious position if the recovery doesn’t come quickly. Instead of thinking “I can keep cable TV as long as things turn around soon,” consider thinking “Cable is not a necessity, and for the time being, non-necessities do not get favor.” While this may turn out to be an unnecessary cut, it may also turn out to be the first step in helping you live below your means.

  1. Times Online: Loss of liquidity, not insolvency, caused credit crunch []

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