The May issue of Money Magazine has an article with poll results about how people have been changed by the current financial crisis. The results seem to indicate that there will be many lasting effects of the crisis in much the same way that the Great Depression changed the relationship that almost all of its survivors had with money. Savings rates are up, consumer spending is down, and people report that they value their families more and money less than they did before the crisis started. If this is the case, maybe the crisis isn’t such a bad thing?
From the poll:
- Nine of 10 respondents said they have changed the way they manage their money as a result of the economic crisis
- Seven of 10 said their priorities are shiftng as well
- A “whopping” 94% said the recession will have a lasting impact on the way they handle their finances
Naturally, I started to think about whether and how the crisis has affected how we deal with money. I think that the basics of our money management system have not changed. We still make monthly contributions to our Roth IRAs, put aside some money for charity, add to our emergency fund, and plug away at our car loan, business loan, and mortgage. Because we are relatively young, we continue to invest most of our retirement money in stock market index funds (which have gained 30% in value over the last month, by the way…) diversified across a number of different global markets. Our monthly contributions are taking advantage of dollar cost averaging.
After ScrapperMom’s layoff in October, however, I became far more concerned about how long we could get by with no income — i.e. the size of our emergency fund. Currently all of the money that’s technically allocated for emergencies gives us a 3.75 month buffer (up by 1.45 months since August) and 4.9 months of savings if you count all of our cash on hand. This is still a pretty nice cushion, but in a tough economy it could take a year to find a job to support our current lifestyle (see Avoiding Lifestyle Inflation to keep yourself out of this situation in the first place). It took me 9 months to find work after the terrorist attacks of September 11, 2001. Few places were hiring at the time simply because of uncertainty.
So, if anything has changed in the last 6 months in the way we deal with our money, it’s that we have been putting more of an emphasis on building a larger emergency fund and lowering our fixed monthly expenses. Little by little we have been socking away more money to roll into our emergency fund CD ladder. At the same time, we have been paying down the debts that require us to make monthly payments, such as our business and car loans. Once these debts are paid off, then the “size” of our emergency fund will “grow” overnight by virtue of the fact that the same money will last longer should the need arise when we have fewer monthly obligations.
What about you? Have you changed the way you deal with money since the beginning of this crisis? Have you changed your investment strategy at all? If so, how? If not, why not?