Now What Do I Do?

I don’t remember ever having been asked so many questions about the economy as I have over the past few years. Of course, as a professor of economics, I am accustomed to the occasional “where should I invest my money?” but the recent meltdown and feeble recovery has everybody asking what in the world is going on? For those who are really interested, I would encourage them to enroll in a macroeconomics course. However, there is much to be said that doesn't require graphs and equations. In a nutshell, this is what I am telling my students and others who ask.

First of all, expansions and contractions are inherent in a market based economy (regardless of who is in office). We put up with these fluctuations because market economies produce greater innovation and higher standards of living than the alternatives. Fortunately, we have roughly seven years of expansion to one year of contraction. The down side is that market economies are not very forgiving of reckless behavior. And, oh, have we been reckless! We are a nation with a badly inflated sense of entitlement, living far beyond our means with the expectation that someone will bail us out when our frivolity boils over. Individuals, families, and government all spend more than they bring in, and we are now seeing some of the fallout from such irresponsibility.

The solution is simple but unpleasant: We need to become a responsible people:
 

• Cut up the credit cards if you can’t handle them and get rid of the cell phones if you can’t afford them. Drive cars and live in houses that leave you with enough to save 10-15% (including employer contributions) of your income for retirement. And speaking of retirement, Social Security was never meant to be more than a supplement. Spending like a drunken sailor (my sincerest apologies to drunken sailors) with the belief that Social Security or any other government program will swoop in to save you will result in very lean “golden” years.

• Get all the education you can. In a highly competitive global economy, education is the key to survival and success. Good jobs that require physical strength are diminishing. Brain power is where the future is. Learning how to learn is your most important skill. Updating job skills and even changing careers is often necessary in these days of rapid technological innovation. Be flexible; it will probably be necessary to relocate a time or two.

• Plan on working into your 70s. With increasing life expectancies, 65 is awfully young to retire. Even with the best planning, you risk running out of money if you retire too soon (keep in mind that medical and custodial costs can be enormous in the last few months/years of life -- between $4,000 and $10,000 a month depending on where you live and the level of care). It would help to find a career that you love. The more education you obtain, the more likely you will be able to achieve this.

• Use debt only for the following: 1) house, 2) education, 3) automobile. But be prudent in all three. Avoid as much student debt as possible. Get a part time job and work your way through college. Drive a used car and do not over extend yourself on the house you buy. Even in the aftermath of the housing bubble, you may still qualify for a loan that exceeds what is prudent (do understand that real estate agents and loan officers are not financial advisors). And despite aggressive (and sometimes unscrupulous) lenders, the borrower bears the responsibility of studying and understanding all of the terms of the contract.

Financial and economic illiteracy is an enormous problem in our nation and has had devastating consequences. A tragically large proportion of our citizens (including an alarming number of politicians) do not understand even the most basic economic principles. Become a student of personal finance. Learn about prudent investing. Understand the relationship between risk and return. Understand the importance of insurance and have the right kinds and right amounts of insurance. Learn about taxes and retirement planning and estate planning. There are many good books on these subjects. Do not simply leave it to brokers and agents. Whatever your field of expertise, you need to know something about financial and risk management.

The bottom line is to be responsible and accountable. You put yourself in great danger of sabotaging your future by engaging in risky and self-destructive behaviors (e.g. drug abuse, alcohol abuse, sexual promiscuity, and … too much debt!). Learn to say no to enticing advertising and credit card offers. You are the one who is in control of your life -- live like it. Take advantage of the opportunities that are before you. Work hard and think big. Most of all persist and persevere. There will be many challenging and painful times in your life. Be tough and power through them -- responsibly.

MM