DON'T ROB PETER TO PAY PETER

Self-fulfilling Prophecy Department---When we believe that economic times are getting tough, we curtail our spending and put away some extra money for that "rainy day" possibility. Less spending by consumers is a drag on the economy. Many employers can't stay afloat if customers aren't spending money to buy their products. So they lay off workers. Which means fewer people with money to buy things. Which sends the economy into a ditch. Round and round it goes until consumer sentiment perks up and times get better. One problem in this scenario is that too many people refuse to give up their spending patterns. Uh-oh. All too many people are borrowed up to the hilt. The credit cards are maxed out. The home equity line is capped. And lenders aren't eager to make new loans or grant credit except to those people who least need it. For those who still have some borrowing room in their portfolio, heed the following. There are some hard and fast rules when it comes to borrowing. They are all inter-related. #1) Don't borrow long to pay off short. Example: Taking out a 30 year mortgage to pay off last months credit card debts or last summer's vacation. #2) The term of any loan should be equal to or shorter than the life of whatever it is you're buying with the borrowed money. Example: If you trade cars every three years, your car financing should be for no more than three years. Otherwise, you'll end up still owing money on the old car when you trade it in. #3) Don't rob Peter to pay Peter. Too much of this is happening these days. Your normal cash flow (income minus expenses) doesn't leave enough to pay down your credit card debts. So you borrow on a home equity line of credit to pay the credit card debts. Or vice versa. Who are you kidding? You're swapping one debt for another---robbing Peter to pay Peter. Any combination of swapping debt, or otherwise reducing your assets, is just as foolhardy. Refinancing your first mortgage to make payments on your home equity loan? Dipping into your 401k or IRA plan to make payments on your first mortgage? Cashing in savings to replenish your 401k or IRA? You're just moving money around, accomplishing nothing and facing possible tax and penalty consequences, not to mention interest costs. When your expenses start to exceed your ability to pay, THE ONLY SENSIBLE THING TO DO IS TO CUT BACK ON YOUR SPENDING. It doesn't take rocket science to figure that out, but spending addictions can be hard to break. Here are a few suggestions as to how you might be able to cut your expenses without materially sacrificing your life style. Communications How much are you spending on your cell phones, land lines, Blackberries, iPhones and the like? Can you restructure your calling plans to reduce your monthly outgo? Are you going over your limit on cell phone minutes and getting into higher per-minute costs? Do you (or your kids) really have to be emailing photos and videos via your cell phone as much as you do? Can you reasonably cut back on what you're spending downloading music, ring tones and games on your cell phone? (See yesterday's posting for a broader look at this money gobbler.) Television It's wonderful to have all of those premium channels, but can you make do with one or two---or even none---instead of the whole smorgasbord? Movies on demand are a wonderful convenience, but at five bucks a pop aren't you being extravagent? Yes, I know, it's a lot cheaper than going out to the movies, but there are cheaper options still. Netflix? Or how about your local library, where there might be hundreds of good movies that are free? Driving Three-plus dollars per gallon might be just a wake-up call for the four dollar a gallon ripoff. The first and foremost way to save---if you haven't done it already---is to carpool to work, to school, to after-school activities. At $3 per gallon, a 20 mile round trip (10 miles each way) will cost $3 just for the gas, assuming you average 20 miles to the gallon. 20 trips per month uses up $60. How could you put that $60 to better use? Wear-and-tear and other expenses add a lot more cents to that per mile cost. Consolidate your trips to the market and mall---one per week instead of two or three. Keep a tight leash on the kids' often needless cruising. Ask if you can have a work-at-home day once or twice a week. Many employers might be happy to let you USE ANY MONEY YOU SAVE TO REDUCE DEBT, WHICH IN TURN WILL REDUCE YOUR INTEREST COSTS. When times get better you can always start borrowing and spending again---perhaps more prudently, if you learn any lessons from an economic slowdown. Meantime, make use of the budgeting and spending guidelines in Personal Finance, Chapter Two pages 57-64 and all of Chapter Three, pages 76-107. They're available at no charge in the textbook, which can be accessed by clicking on the box in the right column.