Batten down the hatches and prepare to weather the financial storm ahead
We live in interesting and changing times. We have gone through a period of huge growth in our economies. Huge growth in credit, a massive demand for ‘toys’ from consumers and we have had the cheap oil and cheap minerals to make the goods from.
Most of us have done very well in the last 40 to 50 years. Economies based around cheap oil, cheap minerals and cheap labour have developed well but the growth has been dramatic over the last ten years or so. All that growth has been fueled by easy credit which has enabled consumers to fund an insatiable demand to buy new gadgets, better cars, televisions and designer clothing, all of which, of course, goes out of fashion the moment you have bought it.
We have been buying, throwing away and buying a newer version of items while we are still paying for the previous years model. We have been enjoying a life we aspired to even though we didn’t have the cash to pay for it. Now it seems, the chicken has come home to roost and we have to pay for yesterdays pleasures and toys. It has been fun but now we must suffer the discomfort that invariably follows excess. Just like the drinker with a hangover we may say ‘never again’. Experience tells us that we will soon forget those wise words but for now we must do what we can to recover.
The cost of goods has been kept low by cheap credit, cheap oil, cheap manufacturing costs and cheap food. ALL of these have become more difficult or more expensive over the last year or so. We have had a good run for our money but it wasn’t our money we were using to enjoy the fruits of growth in our economies. It was mostly borrowed and now we have to repay that debt we took on. Consumers, companies and countries have built up enormous levels of debt. As the debt increases so do the repayments and we all have to find the money from somewhere. Governments can raise more tax, using ever more devious means to do so, but for the rest of us who have a regular income it is mainly a case of cutting our costs as best we can to match our income.
We all have to reduce our expenses and the most obvious things to cut back on are the ‘toys’. The gadgets and gizmos that are fun and enjoyable but not essential to life. Some things are important like food and shelter so a sesnible budget that allows for the cost of food and our mortgage or rent is essential. Any excess must be used to reduce our debts to more manageable levels. There is nothing fundementaly wrong with debt but it needs to be kept in proportion to our income and there is always the risk that our income will suddenly stop or be reduced. Most bankruptcies follow a sudden and unexected event like sickness, redundancy or divorce and you can’t plan for the unexpected. You can ensure that you are well prepared for whatever might happen and that is what we all should do.
As we all cutback on our spending the effects will be felt in manufacturing and service industries and with demand faltering there are bound to be cutbacks and joblosses. It is hard to see any other alternative other than borrowing yet more but you cannot go invreasing your debts forever.
We don’t know what the future has in store. We are told there may be a mild slowdown in growth. Some say there will be a significant recession. Whichever forecast is correct those most prepared will survive the impact best. Reduce your spending on unimportant items, get your debts under control. Batten down the hatches and prepare to weather the storm. Build up your cash reserves and have an emergency fund. You never know when you may need it and maybe you never will but you will be so glad it was there if ever you do need it.
