Getting Back to Basics

Member Group : Lincoln Institute

Though payrolls increased in April, unemployment edged up, as hopeful job seekers flooded back into the job market. Yet despite increased payrolls, a troubling trend is emerging: the number of workers out of work for six months or longer is, unfortunately, on the rise. For those unemployed, the financial stress and damage can be devastating. So how do you financially prepare for such a risk? Are there steps you can take now to help cushion the financial uncertainty of receiving notice? Doug Keegan of Harris SBSB is here to explain.

Doug, the labor market seems to be improving, yet the unemployment rate went up. Can you explain?

The jobless rate went up from 9.7% to 9.9% because workers came back into the labor pool. For the first time in a long time, workers saw an improving job market and decided to jump back in. But until the demand for workers soaks up supply, this trend will continue. And unfortunately we have a long way to go before we get back to say a 5% unemployment rate. In fact, it could take more than 5 years before we recover the some 8 million jobs lost during this recession. Yet there’s no question, private sector job growth is starting to accelerate. Hopefully, this trend will continue.

Right, these higher payroll numbers should build confidence back into the market and spur even more job growth, correct?

Yes. Our economy, for better or for worse, is based on consumer demand. If consumers feel confident, they’ll spend. It not, they’ll pull back. Once businesses see an increase in demand, they’ll hire. But until then, we’re on shaky ground. Look, many employers want to hire they’re just concerned about demand. So, in place of hiring, many employers have asked employees to simply work harder. And American are in fact working harder and getting the job done. Let’s not forget that Americans are hard, productive workers. Yet, as we all know, there comes a tipping point where employers can’t squeeze any more productive capacity out of their workforce and must hire. I think the 2nd half of this year will tell us if we’ve reached that tipping point. If we get steady demand between now and the end of the year, I think employers will increase payrolls. If not, they won’t. A lot will depend on how business reacts once government pulls stimulus from the marketplace. The concern is can business make up that gap. The other headwind of course is government spending and taxes. As of today, there’s no clear direction on tax policy. This creates uncertainty and negatively impacts job growth.

Is there anything in particular about this recession you find troubling with regards to personal finance?

We weren’t prepared. And in this modern economy of ours, since unemployment can happen to anyone, you have to be financially prepared. Sadly, we weren’t. Prior to this recession, many Americans went on a wild spending spree, living far beyond their means, taking equity out of their homes like it was an ATM machine, buying all kinds of fancy consumer goods, and basically living on the financial edge. Once the recession hit, many Americans weren’t prepared. But, there’s hope. Perhaps this recession has been the wake-up call we needed. For example, according to a recent tax refund survey, of those surveyed, 82% of Americans plan to either save this year’s tax refund or use it to pay down debt. That’s good news. A few years ago, it would have been spent.

Let’s discuss what steps to take to be better prepared financially. What are the basics?

The first step is to write down what you own and what you owe. In financial terms, this is called your net worth statement. If you owe more than you own, you have a negative net worth. If you own more than you owe, you have a positive net worth. Obviously, the goal is to increase your net worth over time. Pay particular attention to credit card debt and car loans. Those are two trouble spots. Also, check if you have sufficient cash savings for a rainy day. We’ll talk more about those areas later.

The next step is to revisit your budget. If you don’t have one, it’s high time you get one. Why? Because without a written budget, how can you possibly prioritize spending. A budget simply tells your money how you want it to behave. It allows you to make the best use of what you have worked so hard to earn. In fact, let’s talk about consumption in terms of labor. Let me explain. Say you make $20 an hour. And of that $20 an hour, $10 is already earmarked for fixed expenses like house and car payments, leaving $10 for variable and periodic expenses. Now, let’s say you want to buy a power tool that costs $200. Here’s the question: How much do you think that power tool will cost you in terms of your labor? Well, most people would say 10 hours, right? Two-hundred dollars divided by $20 an hour equals 10 hours of my labor. But, you see, you just tricked yourself. In reality, that power tool will cost you 20 hours of your labor, not 10. Here’s how. If 50% of your labor is already earmarked for fixed expenses, you only have $10 left over for other things. So you take $200, divide it by $10 an hour and that equates to 20 hours of your labor, meaning, you’ll have to work twice as long to buy that power tool than you had originally thought.

So the first two building blocks of money management are: (1) knowing what you owe and what you own, and (2) creating a spending plan. If you need help, the National Endowment for Financial Education offers free online content at Click on the resource library to find great worksheets and articles to meet all your money-management needs, including how to financially prepare for a job loss.

Doug, so once someone gets the basics down on paper, what’s next?

The next steps while easy to say, are very difficult to do. They take time and determination. I should know because I’ve done them. These steps are not mine. They actually come from financial author and media personality Dave Ramsey. He calls them his baby steps to financial peace. And guess what? They work. Here are the steps:

First, if you have credit card debt and little in savings, you’ll want to first start out by making sure you bank at least $1,000 in cash in case of an emergency. That’s step one. Step two is paying down credit card debt, from smallest to largest, rolling each payment until the debt is gone. That’s step two. Step three is to build up your rainy day fund. How much? Add up your essential monthly expenses, and bank at least 3 to 6 months worth in cash. That way, in case anything happens, you have a cushion. Those first three steps are crucial. And they’re tough to do, particularly if you have credit card debt, no savings, and live paycheck to paycheck. If you’re in that situation, you’ll really need to take a look at your budget and do your best to eliminate unnecessary expenses. You may even want to take a part-time job to generate extra income. But once you get debt free and create a rainy day fund, you’ll feel really good about your progress. But like I said, these are the hardest steps and they take time and determination.

The fourth step is to contribute to a retirement savings accounts. Your work retirement plan is probably your best choice, as there may be a company match on what you put in. Also, if you don’t see it or touch it, you can’t spend it. That’s the convenience of payroll deduction. Strive to save at least 10% of your gross pay, ideally 15% if you can afford it.

The final three steps include saving for your child’s college tuition, paying down your mortgage, and finally building wealth outside your retirement accounts.

As you can see, the program is quite simple: (1) create a spending plan, (2) get out of debt, (3) plan for emergencies, and (4) save for the future. But it’s all about laying a solid foundation. That’s the hardest part. That way if you do get laid off or even worse become disabled, you’ll have the financial means to see you through.