Photo: Wolfgang Staudt
Picture a country with thousands of islands settled in a beautiful blue sea that features miles of topless beaches where guys once drank wine and popped olives without a care in the world. Life was good until the global recession hit. Now they’re brawling in the streets because their government is threatening to freeze their salaries.
That country would be Greece and they’re one of the PIIGS you’ve been hearing about in the news lately. The acronym PIIGS stands for five European nations: Portugal, Italy, Ireland, Greece, and Spain. These nations followed stupid economic policies and are facing a crisis that’s having a bad effect on the global economy.
Some of us have personal experience with foolhardy economic policies and we know how the story ends. Like the guy who was once riding high, buying shots of Patron or bottles at the club and making sure you were drinking on his dime; now he’s the guy who only goes out on dollar draft night, and even then he’s drinking slowly so that you’ll buy the next round. What a tool.
So don’t be a PIIG. Let’s take a look at the mistakes these countries made so we can cull some personal finance lessons from PIIGS.
Use credit the right way
Credit is an important part of our modern economic engine. Individuals and companies need to be able to borrow money easily so they can pay for things they don’t have the cash for right now. In the hands of prudent, responsible adults, credit is a great thing. In the hands of people who don’t read the fine print (and PIIGS), it can be a nightmare. Specifically, the fine print that says: “Eventually you will have to pay this money back.”
That’s the dilemma facing the PIIGS. They borrowed too much money. The global economy headed south and now they’re having trouble servicing their debt (i.e., paying the interest on what they owe).
The key personal finance lessons from PIIGS here is to understand the three big ways that you can get into trouble with debt. They are:
* Credit card: Nobody likes carrying around cash these days. Credit cards are a convenient way to pay for stuff. However, credit cards also allow you to buy a ton of stuff you don’t need. Remember the fine print. Eventually you have to pay it back — with interest. So don’t get carried away. If it’s not something you need right now or something you’ll be able to pay off when the bill comes, don’t put it on your credit card.
* Mortgage: Home ownership is still a good thing. Real estate is still a great investment. Right now people are buying homes that they’ll enjoy for years and eventually sell at a profit. But don’t get in over your head. That’s what caused our 2008 financial meltdown. Before you buy a home, educate yourself. Build up emergency savings. Know the terms of your loan. And make sure you’re going to be in your home for five years or more.
* Student loan: We’ve always assumed that student loans are “good debt.” “Good” because education ultimately helps you get into a career that will make you more money. Remember, too much of a good thing stinks. Do an online search of Michelle Bisutti and student loans. The PIIGS were doing fine when the global economy was doing fine. They got burned when the recession hit. Similarly, a lot of student loan borrowers are getting burned because they can’t get a job in this economy, which means they can’t service their student loan debt.
Have a rainy day fund
The problem with running up huge debt is that it doesn’t bite you right away. Like the guy buying drinks at the club, you can live like a king for a while. That’s what the PIIGS did. They didn’t get into trouble until the global recession hit. This recession is battering the U.S. economy for sure, but it’s threatening to all but bankrupt these less-stable countries. So, build up a “rainy day” fund in an account that is not your main checking account. Look into online banking sites. ING Direct offers a decent rate of return and lets you transfer money back and forth to your checking account. Financial planners recommend you sock away three to six months of living expenses.
That might seem like a lot, so build it up slowly. Start with $50 each paycheck. The online bank will deduct it automatically from your checking account. Try to increase that amount a little bit each couple of months. Then in a few years, you’ll have a decent “rainy day” fund. If you lose your job or a source of income, or your car dies, you won’t be using your credit card just to survive each month.
Tighten up your monthly budget
Why did these countries borrow beyond their means? Because they were spending beyond their means. They have big centralized governments that offer generous salaries and benefits to their employees. They also provide free health care and retirement benefits to all of their citizens. Now they’re facing the prospect of drastically reducing these benefits and the people aren’t happy, which is why they’re rioting in the streets.
Don’t wait until a catastrophe forces you to make drastic cuts. Rioting in the streets won’t do you any good. Start looking at your budget now for ways to save money. Specifically, try to find savings on:
* Your phone bill: If you’re past the point where canceling your cell phone/wireless contract will incur a penalty, start shopping around. And do you really need a landline in your home? Some people use their cells so much that they can go ahead and do without their old-fashion home phone.
* Your internet/cable: You’re probably paying for 150 or so channels that you don’t use. So think about your viewing habits and consider doing away with pay TV completely. Lots of shows and movies are available online for free at sites like Hulu.com.
* Your insurance coverage: Maybe the gecko’s right. Maybe he can save you 15% or more on your auto insurance. Also, take a look at your health insurance through your employer. Many employers are offering high deductible health insurance plans with Health Savings Accounts, which is a great low-cost option for a healthy single person.
Communication is key
As bad as things are for the PIIGS, they probably won’t have to declare bankruptcy. They will be bailed out by the stronger countries in the EU; specifically France and Germany. And it will be an expensive bailout. So why did those countries let this happen? One of the criteria for being in the Eurozone (the group of 16 countries that use the Euro as their currency) was that they were all supposed to keep their debts at preordained levels. Why didn’t they enforce the rules?
The short answer is because Greece hid their debt. With the help of American banks like Goldman Sachs and complicated debt instruments called currency swaps, nobody knew Greece was racking up huge debts. So, even though their fortunes are linked, the other countries couldn’t have done anything about Greece’s debt until it was too late.
This is a good lesson for those of us in relationships. If you’re engaged, married or living with someone, then chances are your financial fortunes are linked as well — you share. You share utilities, grocery bills and entertainment expenses. If one of you is racking up debt behind the other one’s back, then you’re going to be sharing that as well. And that’s a nasty surprise that can kill a relationship. So be honest about your financial life. If you’re a spender and not a saver, there’s nothing wrong with having someone help you develop better habits. And if you’re the saver and the other person is the spender, then speak up. It’s bad enough when someone gets into trouble over debt when it could have been prevented. However, when that debt threatens to take you down as well, you’re really not going to like it.
Stay out of the piigs’ sty
We’ll continue to keep an eye on the PIIGS crisis and hope that it doesn’t pull the rest of the world into a double-dip recession. However, we really can’t do anything about it. What you can control is your own financial life. The crisis could actually be a good thing for tourists as the Euro is expected to weaken against the value of the U.S. dollar. That means you can drink more wine in French cafes if you head over there. Just don’t put the entire tab on your Amercian Express.
Personal Finance Lessons From PIIGS Provided by AskMen.