So the economy is bad, now what?

Posted By Paul

So I've been thinking a lot about the recent downturn in the economy. Specifically I've been thinking about how I want to react to it and what I should do.

Then I remembered something from a book I've read (and recommended in earlier posts). The book is called:
The Millionaire Next Door

One thing it talks about in the book is playing "offense" and "defense" with your finances.

The idea is that offense is about bringing money in. Getting raises, making sure your investments pay off, anything that is designed to bring in money is considered offense.

Then there's defense. Clipping coupons, finding ways to lower your utility bills, and good old not buying stuff all count as defense. They don't bring money in, they keep it from going out.

The book suggests that the best thing to do is to always keep an eye on both aspects of your financial life, because playing great defense without a good offense (or vice-versa) doesn't really help you much.

So I've been thinking that with the economy slowing down, my wife and I are really focusing a lot on defense, since the potential for good financial offense seem smaller and smaller (stock market isn't doing so great, interest rates are down, and I'm not assuming that I'll get a great raise this year).

So what sort of things can you do to focus on defense? Well the first thing we've been doing is watching our expenses closely. We still have a social life, but now dinners at fancy restaurants have been replaced with more casual dinners like pizza at someone's house, or picnics in the park (which it turns out is just as much fun and much cheaper). We've also been scaling back on movies, instead we've been watching DVD's that we rent. Not to say that we won't check out some of the big summer blockbusters, but it definitely won't be a movie every weekend (which you know isn't too hard for me, if you've read my earlier post No More Movies).

The second thing we've been doing is watching the monthly expenses, trying to see where we can save a few bucks. We've cut out fancy cable packages, we don't have gym memberships, we are a cell phone only family, and our big extravagance is a one disk membership to Blockbuster Online.

The third thing we've been doing is that just for now we're taking a very frugal look at one time expenses, trying to determine if we want to spend the money now, or wait until later. One example is that my passenger window on my car is having trouble (the glass is intact but it won't roll down), and normally I'd probably pay to have it repaired immediately, but for now I'm going to just live with it in the hope of either getting some time to try fixing it myself or maybe find a way to get it repaired on the cheap.

It probably sounds like my wife and I are pinching every penny, but I really don't view it like that. We still get to go out and have fun with friends and family, but by making a few conscious decisions to tighten the belt, we can have that fun and still keep saving. It lets you feel like you're in control of your finances in uncertain times, and once the economic climate improves then we can splurge a little more, but with the current outlook (and a baby on the way) every dollar we save lets us sleep a little better.

I guess our philosophy when it comes to playing financial defense is: "Spend as if you were poorer than you are, so you'll never have to be that poor for real."

Not very catchy, but a good way to live when economic forecasts are gloomy.