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Back to Basics

In the midst of what has come to be known as the “great recession,” we hear the stories or may have first hand knowledge of the effects on those who were or became overextended in their financial obligations. I’m guessing that each initial decision didn’t include the thought that the decision was putting the decision maker on the financial edge, even though reflection on the end result might suggest that it should have been anticipated.

In an era of easy access to financing through various debt avenues, we may have lost sight of the prudence of the old strategy of delaying gratification and only making major purchases after the money has been accumulated through a systematic savings plan. Certainly the advertising we are bombarded with suggests we are entitled to have it now and that we should “just do it,” but this strategy, although compelling, can have consequences that no one with the benefit of retrospection would consider desirable. Most major vendors make it extremely easy for us to buy on credit, either through the store or with a credit card, so that we can have the item now rather than waiting until we have accumulated the cash to make the purchase.

A single transaction that is financed can seem innocuous by itself, but the accumulation of several of these individual decisions that didn’t seem to be very dramatic on an individual basis can leave us in a financial situation with no alternatives for recovery when our circumstances change. I tell our clients that I’ve always personally tried to distance myself as far as possible from a potential situation where I would have no financial alternatives due to an accumulation of obligations that can’t be altered. For me, the emotional stress associated with a lack of options produces enough fear to motivate me to act accordingly in the present. I guess those monthly ledgers, tracking the monthly inflow and outflow, that I used to watch my father complete had some lasting impact.

Perhaps the “great recession” and the aftermath will provide the motivation to gain control and knowledge of our finances so that we would know if our decisions are moving us past the point of prudence. In addition to the time-tested fundamental of saving for purchases, a former article about monitoring your annual income offered a structure wherein you determine all items that come up as lump expenditures throughout the year, sum them, and then set aside an appropriate amount monthly so that all the money is there when the expense arrives. With this practice there is a greater possibility that you won’t spend money that is already been allocated.

Both of these examples are ideas, structures and practices that should move you toward prudence while distancing yourself from survival. I suggest you give them a try.

Jerry Mosher, CFP® is a 30 year veteran of the financial planning industry and is president of Mosher & Ellis Financial Planning in Lafayette, California. He has been selected three times as one of the 150 best financial advisers for doctors by Medical Economics.Jerry may be reached at (925) 284-9470.  Securities offered through AMERICAN INVESTORS COMPANY Member NASD/SIPC.