By Kevin M

In previous posts I’ve suggested that frugality can be counter productive if it keeps you hyper-focused on saving money at the expense of increasing your income. There is a very definite “siege mentality” that is inherent in frugality, and if taken too far it can lead to a process in which you’re constantly working to lower your cost of living but never moving forward in any real way.

Today I’d like to look at the flip side of this thinking. In this post I’d like to examine an area where properly channeled frugality can create business opportunities.

Last week I had lunch with my friend Jay and we got to talking about the possibility of a connection between self-employment and being frugal. Jay himself was the inspiration for the question—and for this post. In addition to having a very successful business, one he quite literally built from the ground up, Jay has never held a job. His entire career has been a process of moving from one entrepreneurial venture to another and sometimes juggling two or more at the same time. Oh, and yes, Jay is also very frugal. I don’t mean cheapskate frugal, but more along the line that frugality is a part of who he is.

Have you ever known anyone like this? I’ve known several. Make that many! That’s what leads me to believe that there might be a connection between self-employment and frugality. I’m not sure whether frugality sets the stage for self-employment, or if being self-employed makes one frugal out of necessity. But I’m willing to guess that there are certain characteristics of the frugal that make it easier for them to be self-employed.

What are those characteristics?

An inclination to find the best deals

What ever it is that a frugal person needs he’ll almost always pay less for it than others will. In that process he develops a sense to be able to almost sniff out the best deals on nearly every product or service he buys. A truly frugal person almost never buys “off the shelf”. He hones something of a horse trader’s instinct that he’s able to summon anytime he’s about to buy something. Think of it as buying wholesale, a skill that any self-employed person needs to develop.

”By Low, Sell High”

The inclination to find the best deals is rooted in a deep sense of value. The frugal person knows that what it is he buys is purchased at a lower cost than what most others are willing to pay. This sets the stage to sell what he buys for a profit. The primary “secret” of having a successful business is the ability to buy on the cheap and sell what you buy at a higher price. It’s easy to see how this would help in running a business.

Getting the most out of scarce resources

The frugal not only know how to buy for less, but they also have an uncanny ability to use what they have to the fullest. That may involve using a product past the point where most others would discard it, the willingness to fix or otherwise enhance it to get more life out of it or, failing all else, to find cheaper alternatives.

This is exactly what you’re doing when you’re self-employed. There are business plans, but as anyone who’s ever run a business knows, improvising quickly becomes the order of the day. Since income is never unlimited, the ability to make do with less becomes the critical “other half” of business success.

Managing cash flow

Since a frugal minded person is always aware of expenses and the need to control them, his ability to successfully manage cash flow tends to be better than that of the average person. We can see how this is a benefit in managing personal finances, but it works just as well in running a business budget. By keeping expenses low, and buying only what’s absolutely necessary, the frugal person also maximizes net income.

Staying out of debt

Frugal people are keenly aware that debt and the interest it carries raise the cost of everything it’s used to buy. For this reason, the frugal avoid debt and that works very well if you run a small business. Debt can be the mortal enemy of a business entity, reducing options and cash flow during downturns. By staying out of debt, a business is in a better position to weather economic troubles. The frugal tend to be naturally better at making this happen.

Investment and business asset growth

One of the hallmarks of the frugal is a healthy savings account balance—a natural result of buying on the cheap, keeping expenses low and staying out of debt. This is also a benefit to a business owner since it keeps cash available for future investment. This can be either investment in personal financial assets or investment in the business itself.

Where ever it’s done, when a business owner is able to invest without borrowing he improves the likelihood of both the survival and increased prosperity of his business.

Getting back to the question in the title: Self-Employment and Being Frugal – Is there a Connection? In my opinion, most definitely.

What do you think? Is there a connection between the two? Does frugality benefit a business owner? Can you think of ways it might work against being self-employed?

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By Kevin M

Do you ever find yourself wondering—perhaps when you look at your paycheck or even your W2–I make a good living, why don’t I have more money saved up?

You might look at your income and your regular expenses and think that you should be saving more, but somehow it all seems to just disappear, almost as if there are termites gnawing away at both your wallet and your checking account. And perhaps there are a few termites infesting your finances. Call them “stealth expenses”—stealth because we usually underestimate them—if we even notice them–expenses because that’s just what they are.

We all have fixed expenses that we know only too well—house payments, car payments, student loan and credit card payments. There are also day-to-day survival expenses, like groceries and gas. We’re very familiar with all of these, but it’s those others, the variables, that slowly suck the life out of a budget. Those are the stealth expenses, the ones that aren’t always so easy to measure or even to prepare for.

”Where does all my money go?”

Stealth expenses are “soft” expenses that hit us in small chunks, but they’re substantial when taken together. Worse, because of the variables related to each, you can’t know with any degree of certainty what they’ll cost you in any given year. The prime suspects:

Insurance. This category is complicated by the fact that it usually has several components–home, auto, life, health, etc, that add up to many thousands of dollars each year. Often they’re paid in ways we don’t notice, such as payroll deductions for health insurance and the little corner carved out in the monthly house payment that includes homeowner’s coverage. Then there are some policies that have annual, semi-annual or quarterly payments that can escape yearly budget projections. They all add up to less savings in the bank at the end of the year.

Co-payments, deductibles and co-insurance provisions. Uncovered health expenses–deductibles, co-pays, co-insurance (the percentage of first dollar medical expenses you’re required to pay past the deductible—nearly every health insurance plan has this provision!) and costs for procedures that aren’t covered—also fully qualify as blind-side expenses, and they have an uncanny knack for hitting at the worst possible times. In any given year there’s no way to know what they can be, but they can torpedo a budget in short order.

Utilities. Utilities might the biggest of the stealth expenses. They can easily amount to hundreds of dollars per month but we don’t notice because it’s usually split between several bills (electric, water, garbage, gas, cable, internet, etc). A major complication is weather, which can increase payments even if you’re on a budget plan. Another is unexpected and often steep rate increases. Many utilities are virtual monopolies and if they’re approved for fee hikes you’re stuck.

Entertainment. The stealthiest of all stealth expenses, perhaps because we don’t like to think about budgets and saving money when we’re planning on having a good time. Like dominos, one fun activity usually leads to another, like dinner and a movie. Then there’s the gray zone factor—is eating our part of your food budget or is it really entertainment? What about cable TV? And how to you establish an entertainment budget—and live within it—when you don’t know exactly what your needs will be? Entertainment is, after all, driven more by emotional factors than logic.

Car repairs. Probably the most unpredictable of all stealth expenses, you can budget for this but you can easily miss by thousands of dollars. The reason is the wide variation in repairs costs. Replace a battery at $150—piece of cake—replace the transmission at $2,500–now we’re talking real money. Multiple major repairs could mean that all budgetary bets are off. This is a category where you can get off easy with $500 one year, then get clobbered by $5,000 the next. The older the car or the more vehicles you have, the less predictable the expense will be.

Holidays—especially Christmas. There’s often a tendency to think that this expense can be blended into a budget with little extra effort, a notion that usually breaks down quickly when the January credit card blizzard hits. Christmas in particular is difficult on a budget in part because of its sheer size. It sits astride the “holiday season”, sandwiched between Thanksgiving and New Year’s, and that season often facilitates a breakdown in budgetary order. Not only is there shopping for gifts, but there are dinners out “on the fly” because there’s no time to cook. Then there are decorations and often travel. A blessed holiday for sure, but a hard one on the finances.

If you think about if for a bit, you’ll come up with even more categories that qualify as stealth expenses, but the more important issue is taking control of them. Because stealth expenses have multiple sources, there need to be multiple plans on how to deal with them.

Keep close tabs on ALL spending

Stealth expenses like entertainment get out of control precisely because they escape close scrutiny. Tracking them will show the reality of what you’re spending, highlight substantial increases in spending trends and give you a chance to make cuts where necessary.

Controlling fixed expenses is more important than we think

Stealth expenses usually eat up a bigger chunk of your budget than you think. The wide variety of them can make it hard to establish a workable budget. An alternative is to lower fixed expenses, like housing and car expense. Not only are there fewer fixed expenses, but they’re usually larger so cutting will have a far greater impact.

And here’s a bonus: the lower your fixed expenses are, the lower your stealth expenses will be. For example, the size of your home will affect your utility expenses, while the cost and type of car you drive will have a huge impact on both car repairs and insurance costs.

Set up a dedicated savings account for predictable but irregular expenses

Set up a third savings category—somewhere in between an emergency fund and long term investments—that will cover the loosely expected and vaguely predictable nature of stealth expenses.

Emergency funds are typically based on predictable monthly living expenses, which include regular insurance and utility payments. However, car repairs and health insurance deductibles and co-insurance provisions are close to impossible to predict with any certainty—all we know is that they can happen, and will at some point in the future. How do you save for that?

One way is to average how much you’ve spent on these over the past few years. It’s far from scientific since car repairs can increase as your vehicles age, and healthcare is always an X factor. You could use a worst case scenario on healthcare, for example, by adding up the deductible and co-insurance provision that you would have to pay for a large medical expense for one person, then add in an average amount paid for car repairs. You could also begin loading up the account as the holiday season approaches, or you have a wedding or graduation to attend when entertainment expenses will increase.

Stay liquid!

Liquidity is vastly underrated as a budgetary tool. The lack of it is a primary reason people go into debt. Don’t overload investment or retirement savings at the expense of near term needs. You’ll pay for these one way or another, and it’s always best to do so without using credit.

A “stealth expense” is any expense that we would be likely to underestimate or to even exclude from our budgets; can you think of other examples?

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Entertainment For Less

By Jessica Wagner

Saving, whether it’s for retirement purposes or otherwise, is tough enough without having that added difficulty of being self-employed. Many people have found the benefits of being their own boss and making their own hours but putting money away isn’t as easy when you don’t have a company with good retirement plans.

It’s important to know that you can do this even if you are self-employed. Small business owners and online entrepreneurs alike have found ways to build up their retirement and savings funds. There are many ways to do this and there isn’t just one savings plan that you can invest in and IRAs have long been one of the most popular avenues for retirement savings.

Tax deferred retirement plans

An IRA is an account held by a custodial institution such as a bank or brokerage firm. Generally, IRA’s are designed for middle-income investors. There are no income restrictions for most middle class taxpayers and an IRA is available to everyone.

With a traditional IRA, you can contribute up to $5,000 per year ($6,000 if you’re over age 50) and the tax deduction of the investment is determined by your Adjusted Gross Income (AGI). Depending on your filing status (single, joint, etc.) your contributions can range from fully deductible to completely non-deductible. If you withdraw before 59 ½ then you will be subject to a 10 percent penalty fee. This is subject to exceptions so consult the IRS web site to see if this applies to you.

Traditionally, 401(k)’s are available to those who work for a company that has a plan set in place for their employees, but there are also Self-Employment 401(k)’s available. These plans allow self-employed individuals or business owners to contribute to this plan while receiving tax breaks for the money they put away.

This plan generally allows the participant to contribute up to $16,500 per year, which not only represents a large contribution to retirement savings, but also a substantial tax benefit. Contributions to both and IRA and a 401k are deductible not only for federal income tax, but also for state income taxes. (Neither however results in a deduction for FICA taxes however.)

Creating income streams to fund your savings plans

If you do have your own business and you don’t have the available income to invest larger sums, you might want to consider making extra cash through different opportunities. And some of the best income earning opportunities can be found online so you don’t even need to leave your home or your place of business to make them happen.

Some of these options in fact can prove to be quite lucrative and range anywhere from freelance writing to taking market research surveys. Such opportunities can provide the steady additional cash flow needed to fund savings, and do it in less time than you might think.

Be sure that any income earned from side ventures will in fact be targeted for savings, and not blended with your regular budget. If the extra money is put into retirement savings, there will be little or no income tax on it, which should make your portfolio grow even faster.

Other savings options

You can also choose to set up a savings account or even certificates of deposit (CDs). In this way you can either save money until you’re ready to commit it to long term retirement plans, or build it up separately as a savings source in addition to your retirement investments. It’s always best to have some money in retirement plans and some outside since you never know what can happen between now and the time you retire.

If done wisely, you can start saving for your later years with very little effort. Set aside the extra cash you make and place it directly in various investment alternatives. It doesn’t have to be a savings account or CD. You can choose to invest in the stock market but this option comes with some risk in addition to a return that can be much greater than low interest accounts.

There are many savings choices available for those who are self-employed and these are just a few options. While searching for additional income and investment opportunities—on the internet or elsewhere—be careful of any offers promising huge returns for a nominal investment. There are many scams out there so make sure that any savings plan you invest in and any business opportunity you take on is legitimate.

If you’re self-employed, what are you doing to fund your savings and retirement plans?

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7 Reasons to be Self-Employed

By Kevin M

Even in the face of an apparent economic recovery, many millions of people are stagnating in their jobs, unable to get a promotion or to move to a more promising position with a competing company. Many more are still unemployed or even under-employed. That may be the reality of our time, but should we sit still and wait for better times? Is that even a strategy?

Cutting living expenses is one way to deal with a comatose employment situation, but I’ve argued in the past that frugality has its limits. When all is said and done, you can only cut your expenses so much before finding new income sources becomes an absolute necessity.

If you aren’t content to continue to just muddle through, and want to make things happen in your life, increasing the number of income streams will be the most constructive way forward. And starting a side business is the single best way to do this.

How can starting a side business build a better future?

Moving forward in an uncertain job market

Job security is a thing of the past. We could write books about how that’s playing out but it’s completely unnecessary. The more important issue is how we deal with that reality?

If jobs are uncertain, the best thing we can do is to prepare ourselves for self-employment. Since most people have never been self-employed, the lowest risk way to do this is to begin a business as a side venture while you’re still employed by your company. You’ll have the cash flow from your job, and that will give you as much time as you need to get your business up and make it profitable.

If you haven’t been promoted in a long time, and there’s little prospect of getting a better job elsewhere, it’s time to get started with a side business now. In time, your business can grow into a full time venture. And even if it doesn’t, and it merely functions as a part time business, it can either supplement your income or be one source among several income streams in the event you lose your primary job entirely.

Coping with the rising cost of living

Despite official declarations of an inflation rate sitting reliably within the 1-4% range, the cost of goods and services that we need—food, energy, utilities, healthcare and education have soared. If you aren’t being promoted, and the raises you get are only of the token variety, you’ll have to increase your income outside your job. A side business is a logical way to do this.

Retirement planning

Will Social Security be there when our turn to retire comes around? I think so, but it will almost certainly be at a level well below what today’s retirees are enjoying. Maybe it will be pushed out to age 70, or maybe it will be means-tested—we can’t know. And as pretty as self-directed retirement plan projections are, none can adequately account for the effects of one or more stock market crashes, or of a prolonged period of unemployment.

A successful side business can provide a workable Plan B against these possibilities. It can be a much needed income stream to supplement a reduced Social Security check and a less than expected return on a 401k. This is real life—even in retirement we’ll need options.

Building up savings and investments

It’s tough enough stretching a paycheck to cover necessary living expenses and—hopefully—a little bit for extras. But savings and investing can be lost in the course of just surviving! There always seems to be yet another bill to pay, another unexpected expense soaking up every extra dollar.

Often, the only way to develop a serious savings and investment plan is to create another income stream to fund it. A side business can provide the source not only for building savings, but also to pay down and pay off debt, and to increase investments for retirement.

Bringing out your “inner entrepreneur”

Do you ever dare to ask yourself ”what do I truly want to do with my life?” It can be a lot of fun, but it often gets short-circuited on the but-I-have-bills-to-pay issue. And yet despite this cold dose of reality, most of us are fascinated by the possibilities. Deep inside, we all sense that we could be more than we are–if only…

Why is it important to be an entrepreneur? If we can’t rely on jobs to provide for our futures, then we need to rely on ourselves! That almost certainly means some form of self-employment. But beyond the question of earning a living, self-actualization is a very real human need. We all want to be the captains of our own ships “some day”, to create our own unique paintings of our lives.

If you don’t feel that that’s happening through your main occupation, a side business gives you another shot. Who do you want to be in your life and your occupation? Maybe the answer to that question is closer than you think. A side business may provide that answer—and a whole bunch of other good things along the way.

If you think that building a side business may be the right path for you, but you don’t know what kind of business to go into, check out my post, The Freelance Blog Writer Side Hustle. Blog writing is one of the most promising side ventures you can enter because it’s growing rapidly and has excellent potential to lead to still more opportunities. Even if you’ve never written professionally in the past, this post can help you get started.

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By Kevin M

One year ago—just about to the day—I took my first stab at this topic in Why Earning More Money is More Important than Frugality. It was one of the most popular posts I’ve done in the two years that I’ve had this site up and running. It seemed for a while that I’d covered the topic as thoroughly as I could imagine, but the subject has hit the blogosphere with a vengeance in the past couple of weeks stimulating additional thinking.

That doesn’t mean I’ve changed my original thoughts on frugality—quite the opposite. I’m now even more convinced that I was heading in the right direction on the first go round. My comment on Len Penzo’s 100 Words On: Why Frugality Has Its Limits made me realize that the subject is even more important than I imagined and that it’s time to take it on with some fresh ideas.

Frugality in a changing world

I believe we’re in the early days of a massive era of change that will eventually earn itself a chapter or two in the history books. Think Industrial Revolution here—an event so all-encompassing that it will change life as we know it. Space doesn’t permit presenting all of my thoughts here so it’ll be the topic of a future post that I’ll roll out as soon as I get the bugs worked out of my crystal ball.

In the meantime, we can safely say that at the moment we’re living in world of changing circumstances—I’d dare say negative for most, though I think the very long term will hold many positive surprises.

When change comes, and it seems disruptive in nature, we can do one of two things. We can either circle the wagons and work to protect what we have, or we can plunge forward and try to reinvent ourselves to thrive in a very different looking world.

The obsession with frugality strikes me as part and parcel of the circle the wagons strategy. Inside the wagons, we may feel secure and think that we’re in control, but as conditions outside deteriorate they’ll eventually drag us down in spite of our best efforts.

Frugality works best when you have something approximating employment for life, in a job that pays a living wage WITH full benefits AND predictable increases in pay. In that situation, your income is reliable and rises with time. By cutting expenses and saving the difference you save your way to prosperity.

But that’s not the world we live in any more. Jobs and long term employment are no longer certain, benefits are being cut, and raises–if you get them–are puny. Frugality doesn’t work as well in that situation and isn’t a long term solution to that problem.

The ultimate solution is to move beyond the circle, charge forward and work to cut a new path. Frugality doesn’t prepare us for that, at least not the way it’s generally used.

Micro-frugality vs. macro-frugality

So I don’t risk painting with too broad a brush, let me say that I think there are different types of frugality, and I can identify two as general categories.

Micro-frugality. This type of frugality is searching two dozen expenses for savings in each in the hope that collectively they’ll reach the level of real money. While that may (or may not) happen, the effort itself is exhausting, and requires constant vigilance. It has us researching, analyzing, discussing and executing cuts in nearly all expenses that make up our financial lives, and the effort can easily rise to the level of a part time job.

Macro-frugality. This is cutting the two or three biggest expenses that have the greatest impact on your finances. If your house is costing you $2000 per month between the basic house payment, utilities and upkeep, you replace it with one that you could live in for $1200 a month. A car with a $600 payment is replaced by a used car with no payment.

Macro-frugality makes abundant sense, especially if you’re trying to lighten your load to make a career push forward. You cut the structural expenses—which often causes other expenses to drop as well—and let the rest go. It’s better because you make two or three major changes and then move on. Simple, with maximum effectiveness.

Micro-frugality on the other hand, has us buried in small details. While we should be focused on generating fresh income streams, we’re busy plugging small leaks in our budget. What’s the end game to that strategy?

Is frugality motivated by a hatred of work?

That’s a strong statement but before you judge me too harshly for writing it, I came up with it while reading the comments posted on a New York Times article, Forget Frugality: Focus on Earning More.

The article was written by Ramit Sethi at I Will Teach You To Be Rich, an author and personal finance blogger who’s been very outspoken in his criticism of the frugality faith. There were 90-something comments responding to the article, and from the 40 or so that I scanned, the responses were overwhelmingly negative. I’d even go so far as to say that some of them were hateful, as though Ramit struck a deep emotional nerve.

Why the rabid responses? Ramit was suggesting that rather than use their free time to find new ways to save money, that they instead find ways to earn more money. That was the bone of contention—the frugal wanted to save money precisely so they wouldn’t have to work more.

But was Ramit suggesting that they become workaholics? Hardly. He was suggesting that they think long term. What he was pointing out was that the better use of spare time is to use it to earn more money so that credit cards and other loans can be paid off or savings can be accumulated. With less debt and/or more savings, structural improvements in life take place ultimately resulting in less work, more free time and more money. Its old fashioned work-save-invest, but the masses apparently want no part of it—too much work in the short run.

The primary risk of over-emphasizing frugality

Ever wonder why human beings are creatures of habit? It’s because life is easier that way. We don’t want to have to stop and think about everything we do, to hatch new ideas for the things we do every day, especially those that are mostly about survival. Going into automatic pilot is what we might think of as “brain save mode”, and there’s a good reason for that.

Each of us has only so much creative capacity, and so much time. True, some people are more creative than others, but all of us have the ability. The difference is primarily that some people make better use of their creative skills than others. The same is true of time. Each of us have only 24 hours a day, and much of that is consumed by work and sleep, leaving precious little time for much else.

That begs an obvious question: what are we spending our creative energy and time on?

Are we going to spend it analyzing four cell phone plans to see which is the cheapest? Running from store to store to see who has the best price on laundry detergent? Investing 100 hours of our time on research and efforts to weather proof the home so we can save $25 a month on energy bills?

All of these can seem like noble pursuits, but making a deep dive into details can also be a form of creative avoidance–that’s majoring on the minors, and it’s guaranteed to keep us right where we are.

That’s the risk that frugality brings—that the lions share of our creative energy and time will be dedicated to what amounts to an effort to keep what we have. In a period of changing circumstances and declining economic fortunes, will that be enough? Will it move us successfully into the future? I have serious doubts.

Yes, income generation IS more important

Frugality has its place—certainly macro-frugality does—but what I’m challenging is the notion of frugality as some sort of overriding financial guiding principal. That’s a role it can never fill. If your income shrinks down to zero, you won’t be able to cut enough expenses to survive.

Only by increasing income and generating new sources can we move forward, but it may be even more important than that. Why?

1. Jobs and careers are disappearing fast, and many of us need to completely retool in order to be economically relevant

2. Employers are no longer providing the type of training that will lead us to relevant new careers (they too are circling the wagons and have largely abandoned forward strategies like training in favor of cost cutting and survival)

3. Entrepreneurial skills are becoming critical as the choice for the unemployed is increasingly between self-employment and no employment

4. Developing multiple income streams may be the single best survival strategy in a world where fulltime, fully benefited, living wage jobs are becoming increasingly rare

5. University educations are not only prohibitively expensive, but the coursework is increasingly out of step with the most recent developments in the economy and job markets

6. Developing new businesses and income streams will take time, so the time to get started is now

Income earning ability is our single greatest financial asset. Our overriding financial principle then needs to be that we’ll always have an income—preferably a generous one. Making that happen is now completely up to us, and where we spend our creative energy and time will determine how well we do on that front more than anything else.

If you’re looking for a way to spend more time earning income to help your cash flow, check out my post, The Freelance Blog Writer Side Hustle. Even if you’ve never written professionally in the past, this post will help you get started converting your passions and interests into an income earning business that you can work in from the comfort of your own home.

Your thoughts?
 

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By Kevin M

Jobless recovery–that’s an obvious oxymoron if ever there was one. I first heard the term coming out of the last recession in the early 2000s. Then as now, the economy was somehow miraculously growing without worker participation. Now the term is starting to be heard in connection with the latest “recovery”, and it seems just as meaningless now as it did back then.

Do you ever get the feeling that most of what economists mean when they talk about “the economy” is a semi-worthless pile of possibly bogus statistics?

Mark Twain was credited with saying, “there three kinds of lies: lies, damn lies–and statistics”.

To that I say a big, fat AMEN!

If you have a sense that economy isn’t quite recovering, you’ve got a lot of company—I mean apart from just me. A recent article from CNNMoney (posted on Yahoo!Finance), titled How the middle class became the underclass confirms our worst suspicions.

“Incomes for 90% of Americans have been stuck in neutral, and it’s not just because of the Great Recession. Middle-class incomes have been stagnant for at least a generation, while the wealthiest tier has surged ahead at lighting speed… While globalization has lifted millions out of poverty in developing nations, it hasn’t exactly been a win for middle class workers in the U.S.”

Most significant it seems, is that the apparent decline in economic opportunity seems to be less a matter of the recent recession, and more a factor of longer term trends. Translation: even if the economy is getting better, it won’t necessarily benefit us in terms of employment.

In We Don’t Need No Stinkin’ Jobs (in the U.S.), Charles Hugh Smith at Of Two Minds defines how the growth of the middle class in the developing world is lessening the reliance of major corporations on U.S. sales, and by extension, U.S. jobs:

“As the discretionary purchasing power of the American middle class erodes, four times as many new potential customers appear elsewhere (China, India, etc), hungry to taste the Oreos, become consumed by the iPhone, etc., and ten times as many are potential buyers of toothpaste and other basics…The concern for domestic jobs is mere political expediency.”

As revenue sources grow overseas, business gradually moves operations closer to profitable markets, hence the off-shoring of jobs and complete elimination of operations in the U.S. The fact that wages are also substantially lower in those locations only accelerates the process.

This trend has been long in operation, but largely papered over by the expansion of the financial services industries since the 1980s and running through the early 2000s. With the ’07-’09 financial meltdown, the results of the global shift have become more apparent, and there’s little reason to believe it will reverse.

For those of us in the vast and embattled middle class, the only workable option is to adjust to the new reality. But how do we do that in a practical way?

Accept reality, rather than sugarcoating it or denying it

We often hear talking heads, politicians and even people on the street trying to convince us—or maybe themselves—that the slow burning, long term erosion of the middle class isn’t real. But the anecdotal evidence is all around us in the lives of people who are losing jobs, lifelong careers and even their homes. I know many people in that situation and you probably do as well. Statistics are increasingly backing up the reality that those individuals are facing.

If it’s true that individual experiences and statistics are pointing to a more limited future, there will be no tangible advantage to denying that reality.

Only by acknowledging reality and adjusting our tactics to deal with it do we have any chance of making a better life for ourselves in an uncertain future. Vesting ourselves in happy denials and trusting that the big picture will magically right itself is not a plan.

We can’t go forward until we recognize that the past is gone

There’s a temptation to believe in the past, that the same factors that drove previous eras will also save us today. We might have fond memories of more reliable economic times of the 1990s, 1980s or even the 1950s. But those decades, and the conditions that made them what they were, are long gone. The future isn’t in the past—the future is in the future.

The post World War II order that so reliably insulated and advantaged the U.S. and other nations is gone, and while we might be nostalgic for it, the global environment we’re in today is much different from that world—and it’s our world now!

Take active steps to turn your own ship around

Facing reality is mostly a mental exercise. It means asking questions we wouldn’t before and being prepared for the answers—what ever they may be. It means overcoming a life of indoctrination and entrenched worldviews, and being open to possibilities that are well beyond our personal paradigms. It also means practical action, such as the following:

1. Debt elimination. Lifelong job security is long gone, yet people continue to borrow as though it can still be relied upon. But if the future will be less reliable than the past we can’t afford to continue on that course. Stop taking on new debt, payoff old debt, and work to be debt free. Freedom of action is critical against uncertainty, and you can’t have that when you’re in debt.
    

2. Emphasis on savings. A strong cash position is one of the best insulations we can have. Forget about arbitrary guidelines like saving 10% of your income—save all you can. The more you have, the more options you have for what ever you want to do.
    

3. Developing specialized skills. We can no longer rely on a stable job—what ever that is anymore. Strong skills are becoming more important all the time. Our stock in trade depends on what we can bring to the market place. If we’re weak on marketable skills we need to develop them, if we have them we need to improve them—constantly.
    

4. Multiple income streams. Be open to the possibility of procuring new income sources. Though it isn’t certain yet, our ability to rely on the income stream from a single job is in jeopardy. An online business in combination with a full time job will not only provide additional revenue, but it may give the confidence needed if the reliability of that job were suddenly thrown into doubt. Experiment, implement and improvise, but spread your wings. Your future may depend on it.
    

5. Entrepreneurialism. Full time jobs with living wages and full benefits are becoming harder to find and harder to keep in many fields. Self-employment may be the best hope for anything that looks like a secure future. Stop thinking job, and start thinking business.
    

6. Expand your social and business networks. If what we loosely refer to as “the system” is no longer reliable, we need people more than ever. That includes family, friends, and business contacts locally, nationally and even globally. You never know where opportunity will come from and the more people we’re connected with, the greater the chances of capitalizing.

I believe that we’re in the early stages of a massive shift in the global economy, a change that will be as dramatic and sweeping as the Industrial Revolution, but has yet to be clearly identified and labeled. To the degree that the shift is either positive or negative will have everything to do with our willingness to embrace the shift and change our behavior. Resist it and cling to the past, and we can become victims. Embrace it, and we can be beneficiaries.

What are your thoughts? Do you believe that we’re in—or coming out of—a recession, or do you think that bigger events are playing out? How significant are those events and the changes they’re bringing? How do you think we should be preparing for it?

Related Posts:

Should You Borrow Money to Start a Business?

Starting a Side Business – Why Now is the Time

7 Ways to Improve the Success of Your New Business

Steady Paycheck VS. Self-employment; Which is Right for You?

Pursuing Your Passion Isn’t As Risky As It Used to Be

Why Most New Businesses Fail – And How Not to Become One of Them

By Kevin M

There’s a “stealth expense” that chews through budgets and often leaves us with an empty bank account or even a little deeper in debt each month; its called entertainment expense, and at least part of the problem may lay in the fact that we’re usually reluctant to even view it as an “expense”.

Maybe this is the case because entertainment has a way of defining us—it’s often who we are, which has to be something more significant than just an ordinary expense, doesn’t it?

We can be meticulous about budgeting for housing, groceries, utilities and a host of other expenses, but entertainment is often—to borrow a political phrase—“off budget”.

Entertainment diverts our time into stimulating activities in ways that usually won’t happen through working at our occupations, managing our homes or many of the other more mundane tasks we participate in as a matter of survival. People have sought to do this since the beginning of humanity, but the one thing that’s changed radically is our contemporary willingness to break the bank to make it happen. That’s the part of it that we need to control!

The most basic purpose of entertainment is to have a good time; we need to get past the idea that we need to spend a lot of money, or even any money at all, in order to make that happen. We all have a need to be entertained but there are inexpensive ways to do it, and then there are the other ways—the ones that often lead to debt.

Entertainment as an addiction

I’m not a psychologist, but I’d be willing to wager that much of the spending on gold-plated forms of entertainment these days is an attempt to compensate for weaknesses in other areas of life, such as stress, lack of companionship, lack of community, or other voids. This goes beyond the realm of simply looking to have a good time, to the point that the planet is now crawling with entertainment addicts. And like all addictions, it must be controlled.

Replace costly entertainment habits with less expensive ones, and we can do that simply by engaging in more participatory activities, and by increasing the amount of time we spend with people. Bigger picture, much of the reliance on entertainment might be replaced by reducing stress in your life, by increasing connections with family and friends and with involving yourself more with the community and the world around you.

Do these things, and you may find yourself craving fewer restaurant meals, amusement park visits, trips to bars, and all of the other entertainment activities that can suck a budget dry.

Instead of eating out, going to the movies, to the mall to shop or to costly amusement parks and other venues, come up with some inexpensive alternative activities you can engage in so that you can still keep yourself entertained but without spending a bunch of money to do it. Don’t be afraid to consult with family, friends and coworkers for more activities—see what others are doing for entertainment, especially those of a more frugal persuasion.

Compile a list to help you when you’re looking for something to do—this will help you to develop some new habits and attitudes toward entertainment, at least until it becomes set in your mind.

Eight activities for under $20

To help you get started, here is a list of activities which will get you out of the house and into the world without bleeding you dry:

1. Visit with friends and extended family—your house or theirs; we’re social creatures so people are the best source of entertainment
2. Head out to the local park or a nearby beach; pack a lunch, bring your bikes, in-line skates or a ball or two, and spend a couple of hours just taking it easy and enjoying the outdoors
3. Window shop at the mall; bring $10 with you and remove your credit and debit cards from your wallet; sometimes just being out and about is all we really need
4. Plan “Family Night In” with a home cooked dinner and a video, or cook a nice dinner at home, then go out for dessert afterward—which is just as much fun but much cheaper than a full restaurant meal
5. Go hiking in a state or national park—you don’t need to be an athlete to walk, and you can do it at your own pace and enjoy nature as you go
6. Pass some time in your local library, or at one of the chain mega book stores; you can browse or read for hours and no one will ask you to leave. Some large book stores also have coffee shops, and you can always get a cup for under a couple of dollars.
7. Hang out with family or friends at Starbucks or some other coffee house
8. Pack a lunch or some snacks and spend the afternoon or evening at your local neighborhood or community swimming pool. At our community pool, daily admission is $3 per person, $12 for a family of four, and there aren’t a whole lot of places you can go for less than that.

This is just a start—work on expanding the list, and I’ll bet you could come up with at least 20 activities you can engage in for less than $20 each and many of them free. A lot depends on your own personal preferences, but the more possible activities you can come up with, the less expensive your entertainment will become, so be purposeful in developing a list.

We’ve found over the years, that doing several low- or no-cost activities in combination can make for an enjoyable day. You can have a picnic in the park for dinner, window shop at the mall for a bit, hang out at the bookstore for a while, then go to Starbucks for coffee and dessert—an enjoyable evening for under $20.

The more options and combinations you can come up with, the less likely you’ll need to go to the movies or an amusement park.

What are some other ways you can think of—or have done yourself—that you can entertain yourself or your family for not a lot of money?

By Kevin M

If you have teenagers who play musical instruments or if you’re into instruments yourself, your wallet will love a company called Musician’s Friend.

My son got into playing drums when he was ten years old, not just through the school music program, but as a personal hobby and passion. If your kids are musical types, you know only too well the heavy costs involved in sustaining their hobby: musical instruments aren’t cheap!

Not only are the instruments themselves pricey, but the cost of accessories and replacement parts can rate a line item in your budget by themselves.

In the beginning, we followed the herds into the local music shops and paid top dollar for instruments for our kids. As one example, our daughters’ violin cost $1100; that was four years ago, and now she’s ready to give it up! We originally rented the violin just in case she did decide to quit, but after a couple of years when it looked like she’d keep at it, we converted the lease to a purchase.

For everything since, we’ve gone to Musician’s Friend. Being a drummer and having a drum “kit”, our son is always in the market for add-ons, like cymbals, drum heads, stands and various sundry percussion instruments. Short of taking on a part time job to support his musical habit, we had to find a better way, and we did.

Musician’s Friend has the local music shops beat across the board:

Price. As a rule, Musician’s Friend is priced anywhere from 10-50% below local music store prices. And they run sales too. Usually with discounts this consistent and this deep, there’s a catch, but if there’s one with this company, we haven’t run across it in the nearly four years we’ve been dealing with them.

Variety. Musician’s Friend has a wider variety of products than we’ve seen with any single company—far more than the local stores. If it has anything to do with music, they have it. It’s a real case of “one stop shopping”.

Customer service. This is one area where we’ve been really impressed. Most discount providers of any service fall down on customer service, but we continue dealing with them because they have the best prices. That’s not the case with Musician’s Friend. You can always get someone on the phone, they’re courteous, helpful, and it’s obvious they’ve been empowered to take care of the customer. One experience with them and you’ll see what I mean.

Fast delivery. Musical instruments aren’t usually the type of products you need as soon as possible, so there’s usually a decent amount of lead time when buying. You won’t need much of it with Musician’s Friend. They can usually get your order filled in just a few days, but will work with you if you need it sooner. They run delivery specials on a regular basis where if your order exceeds a certain dollar amount—typically $50 or $100—shipping costs are waived.

Solid return policy. We’ve only had a couple of return situations with them, usually because the item ordered didn’t exactly fit the existing system we have. That’s never been a problem. The company’s return policy is very customer friendly, and there was one time when we returned an item and got a higher priced replacement at no extra charge. Another time, they gave us a freebie as part an exchange. Service like that keeps you coming back again and again.

Check out the Musician’s Friend website next time you need a new instrument or attachment. Saving 10% or 20% on an instrument that costs $500, $1000 or $2000 at the local music shop can be substantial. And the personable customer service won’t be too hard to take either!

Disclaimer: No, I am not receiving compensation of any kind from Musician’s Friend. I’m writing about them because we’ve had a long and very positive experience with them, and because the service they provide can benefit anyone with an interest in musical instruments. There are a lot of crappy companies out there who act as if they only half want your business, but this isn’t one of them. When you find a good company to do business with, you just want to shout about it, and that’s what I’m doing here.

Where are you buying your instruments and attachments now? Have you ever heard of Musician’s Friend? Are their other little known discount providers of various products and services—not necessarily musical instruments—that you could recommend?

By Kevin M

Let’s be honest, most retirement posts in the personal finance blogging world are aimed squarely at people in their 20s and 30s. Those over 50 are presumed to not exist. It’s almost ironic, isn’t it, talking about retirement to people who are so far away from retirement that it’s very nearly irrelevant while ignoring those for whom it’s right around the corner?

Maybe it’s that the vast majority of people on the web are under 35, or maybe it’s just easier making multi-decade projections to a group of people so far from retirement that they’ll never remember any bad advice they’d gotten early in life. And in a different direction, all things are possible when your time horizon is 30, 40 or 50 years. Those magical retirement projections that’ll turn us all into millionaires just wouldn’t work without all those decades!

But what if you don’t have decades to accumulate a retirement fortune? What if you’re over 50 and retirement is just a few years away? If you don’t have at least a healthy six figure portfolio, how do you prepare for retirement now that the luxury of time is no longer available to work in your favor?

Get working on Retirement Plan B

Delay Retirement If retirement at age 65 isn’t a doable goal, move it out to 68, 70 or even 75. Not only will that provide extra time to accumulate additional funds for retirement, but it will also shorten the time period you need to cover. For example, assuming a lifespan of 85 years, you’ll need to accumulate enough money last for 20 years if you retire at 65. But delay retirement until 70, and you only need to cover 15 years. The longer you can work, the smaller your retirement savings need to be.

Ditch your debt pronto! If you can’t raise the income, you’ll have to lower the outgo. If you won’t have a rich retirement plan to carry you in your golden years, then one of the single best courses of action you can take is to get to work on being debt free.

A disturbing trend is developing in which in increasing number of people are carrying higher debt levels into retirement than ever before. People are still paying mortgages well into their 70s! If retirement resources are on the slim side, you can’t afford to be one of the emerging elderly debtor class. Pound for pound, eliminating debt is more effective at improving cash flow than putting an equivalent amount into savings. This is especially true if you’re within 10 or 15 years of retirement. Equally important, once your debts are gone, you’ll have that much more money to put into savings.

Get started on a post-retirement career Relatively few people will have the retirement resources by age 65 to live the classic life of an unrestricted full time retiree. (Most of the ones who will are already rich!) When we add to that equation the actuarial nightmare that is Social Security, a lot good people are going to be working a lot longer than age 65! Don’t dread it, embrace it!

You may not be able to continue on your present job, or even in your current career much past 65, but you have time now to develop a new career or to begin a side business. Get it going now, and build it up so that you can be fully self sustaining by the time you reach 65. Most people view retirement as an escape from work they hate, but if you’re doing work that you truly enjoy it won’t feel like work and you may even lose the desire to retire.

Develop multiple income streams If you don’t have a rich retirement plan, you can add a good measure of security to your financial picture by developing multiple income streams. Plan on relying on Social Security, an income from a side business, seasonal or part time jobs and as many passive sources as you can develop. Ten or 15 years may not be a lot of time to build a big retirement portfolio, but it’s more than enough time to develop two or three or more income streams.

If you’re interested in developing additional income streams, either for retirement or to help prepare for it and fund it, check out my post on freelance blog writing. It’s the kind of work and business you can easily run well past retirement age.

Start saving as much as you can now! I’m of the opinion that most people accumulate the biggest share of their wealth during a single ten or 15 year period when all things financial are breaking their way. Saving at an early age certainly helps, but life can get in the way of even the best executed savings plans, especially when you have children. But if you’re past the child rearing years, and at a high level in earnings, you can make up for lost time much quicker than you think. You may not have the time horizon to accumulate a seven figure retirement plan but what ever you are able to save from this point forward will make life that much easier later. Never give up hope on this!

Even if you’re covered by a retirement plan (and especially if you’re not) the IRS allows people who are over 50 and within certain very generous income limits to deduct up to $6000 towards an individual retirement account. Even if you have no other savings, stashing away $6000 per year for 15 years will grow to $90,000 plus interest. That won’t be enough money to retire to the beach, but it will provide a nice cushion to back up paychecks from Social Security and any job or business income you have later on.

What ever you do, don’t speculate! There may be a strong temptation to “make up for lost time” by plowing money into risky investments looking to make a big hit. But more it’s far more likely that you’ll get clobbered for trying. Since you have a shorter time horizon and less money to play with, keep your investment choices on the conservative side of the investment universe.

Stop worrying about it We often forget that our lives are what we do everyday, not the grandiose plans we hope to achieve. While a generous retirement plan might make you more comfortable, it won’t necessarily make you happy—and that’s the real goal throughout life. Work on the non-financial aspects of your life—your health, your relationships, your faith, your hobbies and your passions. Those are the elements of life we truly crave, but often ignore in favor of financial pursuits because we mistakenly think they can be bought with money. The better your health, the stronger your relationships with God and with people, the happier you are, the more you live your passions, the less important money will be.

 
What would you suggest to a person over 50—or even over 40—who will be unlikely to accumulate a rich retirement plan by the time they reach 65?

Newsflash: You can’t get out of debt until you stop being broke!

By Kevin M

Some argue that if you’re in debt the priority needs to be to payoff your debts before attempting to build a savings account. Many call for the establishment of a small emergency fund—typically $1000—to handle contingencies, and then to pour all extra funds into the pay down and eventual payoff of debt. Only when your debts are paid will you have the cash flow to truly build substantial savings.

While there is some merit to that advice, I believe it fails to address the basic reason a person might get into debt in the first place: a lack of savings, forcing the use of credit as a savings substitute.

Until that cycle is broken, it’s doubtful you’ll ever payoff your debts or accumulate substantial savings. Life has a way of throwing contingency after contingency at us and unless we’re fully prepared to deal with that reality, getting out of debt is little more than a fantasy.

The vicious cycle of debt

I think most people underestimate the deep power debt holds over the debtor, and we often assume it’s simply a matter of a) stop borrowing, and b) payoff your debts. If only it really were that easy!

If you’re experiencing credit problems, either in the form of increasing debt levels or more frequent delinquencies, you’re probably also aware of one or more of the following:

• You probably don’t—and maybe never did—have any substantial savings
• Your credit lines function as your savings account
• Your debt levels have risen steadily over the years, despite the fact that your income has also risen
• You’ve generally been overly optimistic in your thinking, tending to assume higher income and lower expenses than has usually been the case
• The parade of “unexpected expenses” seems to be intensifying
• You may have developed a syndrome I refer to as “debtors optimism”—much like a gambler, the debtor assumes luck will be his savior
• You’re making the minimum monthly payment on your credit cards, promising yourself you’ll get more aggressive with payments later when…

Now a fat savings account won’t make all of these issues magically disappear, but it is a fact that a cash rich position does tend to make the ride in life a good bit easier, and this is at least in part because of the discipline having savings imposes on us. Just learning to live beneath our means—what ever those means may be—can be life transforming.

Make savings the priority

Why is it in your best interest to establish your savings before tacking your debts?

1. No one can be effective in carrying out any plan while being broke
2. While we’re trying to focus on paying off debt, bills are still rolling in, each one having the potential to force us to abandon the payoff effort in favor of putting out the immediate fire
3. Savings give you room to breath! Unless you have margin to fall back on when unexpected bills come in, you’ll panic. Panic is fear, and fear is in no way solid ground from which to conquer your debt problem or even to live life
4. Accumulating savings requires living beneath our means, banking windfalls and developing additional income sources—all of which will help in the later effort to pay off debt
5. In order to save, we must develop a more a realistic assessment of our finances; debtors optimism (or any form of optimism) won’t get the job done

Three to six months of living expenses in the bank should be the goal. I’m sorry, but the $1000 emergency fund won’t cut it—that’s little more than a nasty car repair bill today, and how unusual is that? One “emergency” and you’re back to being broke.

Once you have three to six months put away it’ll be time to tackle the debts. But even once you do, you should continue to increase your savings if only at a slower pace. After all, the same contingencies that put you in debt in the first place also have the potential to drain your savings.

Maybe it’ll take longer to pay off your debts this way, but if you have a cash balance to fall back on in emergencies you’ll have the time you need. In fact, one thing you may want to consider is a divide-and-conquer strategy in which you ignore your debts beyond making minimum payments in favor of maximizing savings.

Once you have the minimum put away (three to six months living expenses) continue saving until you have enough excess to pay off one of your loans entirely. You can continue this strategy of picking off one loan at time until all are paid—and throughout the process you’ll never have been broke!

If you agree that savings is the place to start before paying off your debts, please read Start and Grow Your Nest Egg Even If You’re Broke for some ideas on how to get started. Once you have a few months worth of living expenses stashed safely in a savings account you’ll begin to feel better about your whole financial situation, because it will be better!

Which way do you think is the better way to get control of your finances, build your savings first then attack your debt, or go right for paying off the debt and build savings later?