The New Personal Finance Reality


You probably have made personal finance adjustments to cope with the recession. But you'll need to face the hard reality that some things you grew used to no longer apply today—or even tomorrow.

Here are five personal finance realities that will help you get your house in order:

The downturn is going to last a long time: President Barack Obama made it clear in the opening statement of his press conference this week that we aren't near the end of this economic mess. As he bluntly put it: "It took many years and many failures to lead us here. And it will take many months and many different solutions to lead us out. There are no quick fixes, and there are no silver bullets."

If you were hoping the economic meltdown would be over by the end of the year, you probably need to rethink your timeline. Although Obama believes the government is taking the right steps, getting back to growth is going to take time and patience. If he's correct, it will take at least a couple years. If he's wrong, it could be a lot longer.

It's a good time to begin thinking about making long-term or permanent changes. Since nobody knows exactly how long this economic crisis is going to last, your personal finances will be healthier if you make the assumption that we are looking at years rather than months.

You're going to have less purchasing power: The reality is that until the economy recovers, you're going to be paid less in one way or another. With so many qualified people out of work, companies don't need to raise salaries to attract top talent. Many companies have already begun to cut hours, reduce perks, do away with training and take a variety of other steps that ultimately shrink your purchasing power.

Your credit score is going to matter even more: Your credit score will more likely determine whether you get a loan at all, not just set your interest rate. Banks and other financial institutions already have huge amounts of bad debt and aren't looking to add more. That means you're going to need good credit to qualify for a loan, and if you don't, you're going to have to put up a lot of cash or you may be out of luck.

Taxes will increase and government benefits will be cut: While the Obama administration is looking to give the largest middle class tax cut in history as part of its proposed budget, at some point the stimulus spending costs will need to be paid. There are only two ways to achieve this: increase tax revenue or cut spending. The likelihood is that both will occur.

This economic crisis will hit home: In past recessions, a large number of people were hurt only slightly. This time, you or somebody you know is going to end up in a tight financial situation where there is no "good" financial choice.

Although you want to help those you can, don't put yourself at financial risk. Having a plan for yourself will make dealing with a financial crisis easier to handle.



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