I have received emails and comments in response to the first posting of the Savvy Frugality Economic Meltdown Survival guide, and I thought I would continue the conversation. Some wondered how I could be so positive when all of the finance experts on TV and on the radio have been so negative. I received this question:

"What is in store for those who have no emergency fund?"

A lot of people are in this situation. They live paycheck-to-paycheck and they haven't been able to save anything extra. Not long ago, this is how I managed my finances. Unfortunately, for those without an emergency fund, ANY unexpected expense becomes an "emergency", even if it really isn't. I can't address everyone's individual situation, but I can tell you how I built my emergency fund.

1. The first thing I did: I got rid of a lot of stuff in my house. I sold it on eBay or Craig's List. I don't mean I just got rid of stuff I didn't want any longer. I sold everything that wasn't nailed down. The stuff that didn't sell got donated to Goodwill.

2. If I got unexpected money, such as for gifts or a bonus at work, I didn't spend it. It went straight into my emergency fund.

3. I decided that my household was going to start living on ten percent less than the amount of my paycheck. I still budgeted for things like "miscellaneous" and "entertainment", but each payday ten percent of my check went into my emergency fund.

It took me a few months, but I eventually saved $600. Some people recommend having at least $1,000 to start an emergency fund, but if that seems too daunting, start with $500. Don't spend it on anything other than an emergency. If I spend any money from my emergency fund (which I did today, actually), I immediately begin replacing it starting with the very next paycheck.

The other thing I have noticed recently, especially this morning, is how TV commentators and others have been throwing around the term "Great Depression". Without the $700 billion government bailout plan, they say, the U.S. could be headed for another "Great Depression". "Mad Money" host Jim Cramer and "Today Show" host Meredith Vieira discussed this a bit this morning, along with Cramer's own "economic meltdown survival plan". Hmmm, sounds familiar.

No doubt about it...times are tough right now, but it's nowhere near "Great Depression" status. For those who weren't around in the 1930's, this is what is was like living during the Great Depression:

1. Banks closed down, but not because of bad mortgage deals. "Bank runs" were common. People wanted to make sure they had plenty of money, so they would storm their banks to withdraw all of their cash. FDR imposed "bank holidays" and closed the banks to stop the bank runs.

2. Nearly one in every four Americans was unemployed. Nearly half of all African Americans were out of work. This led to the formation of "soup kitchens", which were the sole means of food for some Americans.

3. In the first two years of the Great Depression, the cash supply and the GNP fell by a third. Yes, that is very bad.

So, while our current economic situation is grim, it could definitely get a lot worse, and we aren't there yet. There is one thing that today's economy has in common with the days of The Great Depression, and that is what caused our economic woes. From the Wikipedia entry about "The Great Depression in the U.S.":

"Although the causes of the Great Depression are still uncertain, the basic cause was a sudden loss of confidence in the economic future. The traditional explanation is a combination of high consumer and business debt, ill-regulated markets that permitted malfeasance by banks and investors, growing wealth inequality, and natural disasters such as the Dust Bowl and 1926 Miami Hurricane creating a downward economic spiral of reduced spending and production. "

Today, we are in the current mess we are in because, to put it simply, a lot of people made a lot of bad financial decisions. Bad adjustable rate mortgages were handed out like candy, people who a few years before wouldn't have qualified for a home loan were being handed ARM loans for $300,000. Investors purchased homes to flip, and when the market soured, they were stuck with a home they never intended to live in.

A couple of years ago, I was actually offered an ARM loan. As much as I wanted to purchase a home at the time, I saw it as a bad deal. If the interest rate adjusted beyond my ability to pay, where would I be? Today, many people are asking themselves that same question.

So, how do we cope with our current situation? To sum up:

1. Avoid debt. Pay cash for everything.
2. Save, save, save.
3. If you do invest, pick "safe" investments: good stocks which have been around a long time, high-yield bank savings accounts insured by the FDIC, CDs and bonds.
4. Don't panic. That's when bad decisions are made.


  1. Jenn // September 26, 2008 at 7:30 PM  

    Great post. The only thing I would add is get rid of monthly expenses that you may not need right now. Our family has the basic cable ($17 in our area - we can't get TV on the antennae), we have TMobile pay as you go phones, get rid of Netflix, rhapsody, etc. It is so much more important to get that emergency fund started than these items. If you have a cell phone contract, see if you can drop it down to the cheapest plan without too many fees. If you do, make sure it does not change your contract commitment. It may be cheaper in the long run to cancel it. It might not be. Just look around and start. Don't give up.


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