What's the wisest way to handle my finances during a period of recession? How do I plan ahead when there's so much economic uncertainty? And how can I avoid setbacks in the future?
Your question takes in a lot of territory. In thinking about the economy and how it affects you, you have to recognize what you can control and what you can't. Economic recessions are normal. Depressions are not normal, nor are they guaranteed to happen, but they can. In either case, as Christians we have to realize that our role in the sweeping drama of human history is to trust God and play the hand we've been dealt. We are part of an increasingly global economy and we must learn to accept the overall economic conditions in which we find ourselves.
The bottom line is that where you and I are concerned, prudent financial management always comes down to the same basic things: faith, hope, self-control and common sense. There is no sure-fire, fool-proof way to avoid future setbacks. – If a doomsday economic scenario comes along, even the most prudent individuals will be swept away with the tide. But that doesn't mean that you can't order your financial affairs wisely, trusting in the Lord to provide your needs one day at a time. And while you can't avoid a major economic downturn, you can certainly minimize its effects. How? The good old-fashioned way – spend less than you earn, reduce your debt, and build personal liquidity through savings and investments.
Since inflation – the rate at which prices for goods and services is rising – is an important element of any recession, you should also be aware of and armed against certain popular myths that tend to circulate around this feature of the economic climate. There are four such myths, and they all contain just enough truth to make them believable. But a closer look will reveal why it's unwise to let them govern your financial habits.
Myth #1: Buy now because it will cost more later. This sounds reasonable, but the real question is not what an item costs now or what it will cost in the future, but rather do you really need it? If you do, you can trust God to supply that need in His own way and in His own time (Philippians 4:19). This myth encourages us to delude ourselves into funding our greeds rather than our needs. And it does this by stirring up fears that prices will inevitably keep rising. The truth is, it isn't necessarily so. For example, in spite of economic downturns, the price of computers and electronic equipment has gone down steadily over the past couple of decades.
Myth #2: Always borrow to buy. Two elements of truth support this myth: first, in times of inflation, the loan is paid back in cheaper dollars than those borrowed (because of the decline in purchasing power); and second, the tax deduction for interest expense reduces the cost of interest on some loans (though not most consumer debt, such as credit cards). Unfortunately, the myth is also based on two highly questionable presuppositions: first, it assumes a rate of interest that is less than the inflation rate; and second, it presupposes that the cash that could be used for the purchase is earning more than the cost of borrowing.
Myth #3: You can never accumulate enough. Fears about inflation cause people to throw up their hands and ask, "Why save for the future? Why bother thinking about retirement? Prices are increasing faster than I can earn interest on my savings." But this begs a more basic question: namely, "How much is enough?" To bust this myth, you just need to remember that if you spend less than you earn, the earning power of your money will, over time, always be greater than the inflation rate.
Myth #4: The rate of inflation is standard for everyone. This isn't necessarily so. The reported national rate of inflation is an average and assumes that people make significant purchases, such as a home, monthly. Such things just don't happen routinely in individual circumstances. Meanwhile, experienced financial planners and counselors suggest that if you plan to have a cash flow margin by living on some type of simple, workable budget, your personal rate of inflation will be substantially lower than the reported rate.
For additional help and information on this topic, we'd encourage you to consult the resources and referrals highlighted below. Or if you have relationship concerns and challenges associated with this situation, please don't hesitate to give our Counseling department a call.
How Do We Live in Times of Economic Uncertainty?: Ron Blue offers his thoughts on financial wisdom, especially for times of economic uncertainty.
Money and Finances