How is our economy doing?

Warren Brussee wrote a book called The Next Great Depression 2007, and I reviewed it a while back in this BLOG.

I thought it was an interesting analysis of what was going on, and I wasn't sure whether it was correctly viewing the future.

You see, I think the world and US economies are very complex things. They are hardly the simple supply and demand curves we all learned about in our Macro-Economics classes. They have all sorts of active influences that are not always logical....but often emotional and irrational too.

But the two things that have struck me personally in the last few years are the lack of savings (we have become a credit culture) and the various bubbles that seem to have grown and at times burst.

The savings rate is documented in the graph in this post. It has now been negative for a couple of years.....and I don't think this can be sustained forever.

The latest bubble that is slowly deflating is the housing bubble. Over prices houses....but this is a huge problem......people rely on those increasing values to fund all kinds of things. They take out second mortgages to spend the money. The other problem is that when people get "upside-down" on a house, they can't sell it for they have no savings anywhere else to pay the loss they have.

ARM loans adjustments have been going up with the interest rates these days, and people often find their monthly payments going way past what they planned.....making them cut back in other areas.

A full 70-785 of our economic activity is based on spending.....with depressed spending levels comes dramastic decreases in economic health. So we are encouraged to spend.....new financing techniques are invented when the old one's become impossible to use.

But we are only delaying the inevidable slide....would it not be better to slide than to "fall"?

Oh well....I suggest people save. Save for a rainy day, and do so with great diversification, because if things begin to slide...or God help us FALL, we will want to make sure at least a part of our money is in a place that is not affected. (lest we lose everything...as some did in the '29 Depression)

The importance of Cash Flow....

These past two months have taught me the importance of having a reserve of money at the ready because at times it is all about cash flow.

That's right, I had a few unexpected bills pop-up last month that centered around the girls trips to school this summer. I thought I had enough money in the bank to cover it all fairly comfortably, but this month the problem came to roost.

You see I had not considered the increased costs associated with the girls coming home. My weekly food bill rose from about $40 per week to over $100. I even saw an increase in my water and electric bill. (I have only one light on at any moment...)

Anyways, the budget I have crafted has very little wiggle room in it. In fact, if I go by the expected expense levels, I am in the hole at the end of the year. (but I have not gotten to things like paying my house and vehicle insurance....things like that will be what drives the account into the red and will require the selling of a longer term asset)

But those have not come due....and the main issue was not that the expenses I came across were totally unexpected....but they were unexpected in that month....certainly all at one time.

Cash flow....the flow turned into a drip....barely enough to feed the need. Thanksfully, I have not had any emergency expenses.....nothing large anyways. I have had a few unexpected things, but that went on the credit card....which only delays the problem until 30 days from now.

I need to build up my buffer again......so I can survive the ebb and flow of money.

I am going to cut back big time where ever I can.....food is the first thing. I am going to try to go a month without buying any food.....basically eat from the cabinets and freezer.

Sound impossible.....not really. I have a number of things in the freezer, and in the cabinets. I might not be eating exactly what strikes my fancy every night....but the checking account will benefit and my fear of balancing the budget week after week will get better. (a small price to pay for lower stress)

Here is a BLOG with good ideas on cash flow. It is written for small business, but many of the concepts are valid for household finance too!

Cash flow is king.....