There's no doubt this recession is having a huge impact on consumers, and as a result, they're cutting back on spending and saving more. U.S. household debt, which has been growing steadily since the Federal Reserve began to track it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending dropped for the first time in 17 years.
The fact that we are tightening our belts in response to this economy is certainly a good thing. But sometimes when we make decisions under pressure -- and there is definitely pressure, thanks to unemployment and the down stock market -- we tend to make the wrong choices. We all heard about the mother who watered down her baby's formula to save money, putting the child's health at risk. You might even know someone who is going without health insurance or the prescription drugs they need.
There are certain things in your budget that can be scaled back very easily, and then there are areas where you simply shouldn't budge.
-- Retirement plan contributions. The Pension Rights Center counted about 20 major corporations in December that publicly announced changes to their 401(k) matches. Many others have discontinued or downsized their traditional pension plans. If your company is still offering matching dollars, you should keep kicking in the money. "To get that free money from your employer is so important for the long-term growth of your retirement nest egg. Especially now, with the down market, when you're dollar cost averaging in at lower prices, that free money has more value in the long run," says Derek Kennedy, an hourly financial planner in Cincinnati, Ohio.
If your company has cut back and you want access to your money, make a contribution to a Roth IRA instead. You can get your contributions out at any time and after five years, you could use the money for education or a down payment on a house.
-- Insurance. Don't cut your homeowner's insurance thinking that just because the price to buy a home has dropped, you won't need as much coverage. What you're paying for is the amount it would cost to rebuild that home and replace your belongings. (If you're looking to save money on that policy, raise your deductible instead. Going from $500 to $1,000 could shave 25 percent off your premiums.) Skimping on the liability component of your auto insurance policy could be similarly disastrous. We live in a society that is rather litigious, so taking only the state-mandated minimum amount of liability insurance can cost you in the long run. If you have an older car, drop collision or comprehensive coverage instead.