The McMansion-owning, designer-bag toting, new-Mercedes-driving consumer is, well, so 2006. These days, faced with scary job prospects, fat credit card bills (that Louis Vuitton tote wasn’t even worth it, was it?!) and houses worth much less than we paid for them, the American consumer looks a lot different than she used to. In fact, she’s living by a whole new set of rules (or, at least, she should be). Here’s a look at what they are:
New Rule #1
Old Rule: Save 3 – 6 months worth of income in your “emergency fund”
New Rule: Save 8 – 12 months worth of income in your “emergency fund”
Back when jobs were plentiful and it was easy to tap into your home equity for cash, you could get away with having an “emergency fund” — money you’d use in case something happened, like you lost your job or had to fix the roof, that had just three to six months worth of income in it. “Now, that’s not enough,” says Elle Kaplan, the CEO of Lexion Capital Management. “You need at least eight months to a year.”
That’s because unemployment is still high and layoffs are common, so you may need a larger cushion. “Desperation can foil a job search,” she adds. “You don’t want to have to take a job that could hurt your career trajectory simply because you don’t have the money to keep searching for a better opportunity.”
New Rule #2
Old Rule: Go to grad school
New Rule: Do a cost-benefit analysis before taking on any school debt
Just a few years ago, it was common to head to grad school when you couldn’t decide on a career path after graduation, or you just simply hated the job you ended up with. These days, jumping into grad school is risky because you will likely take on tens of thousands of dollars in student loan debt and not be able to land a job that pays well.
“You have to ask yourself: does this make sense financially?” says Suki Shah, co-founder of career-search website, GetHired.com. As a general rule of thumb, you shouldn’t take on more debt than what you expect your starting salary to be, experts say. For example, if your starting salary is $50,000, don’t take on more than $50,000 in debt.
“It’s also important to look at the job market for the job you hope to get,” Shah says. “Are people getting jobs in that industry?” These days, you may be better off taking a professional development course in the field you want to move into or going to school part-time. Doing so will minimize the amount of debt you’ll have to take on.
New Rule #3
Old Rule: Buy a home
New Rule: Consider renting
A few years ago, everyone from personal finance gurus to Joe-schmo were screaming, “Buy, buy, buy!” from their overpriced rooftops. “Pre-2007, a lot of people were buying as big of a house as they could afford and then trying to flip it,” says Brian Conroy, a financial planner at Savant Capital Management.
But the tune has changed completely — to the point that in many cases, it’s simply better to rent than to buy. “It’s usually only a good idea to buy if you plan to stay in the house for a least five to ten years,” says Kaplan. “You have to expect slow appreciation.” Even then, it’s important to do your homework on everything from pricing to location to construction quality.
Catey Hill is the author of “Shoo, Jimmy Choo! The Modern Girl’s Guide to Spending Less and Saving More” and a freelance personal finance writer who has written for Seventeen, The Wall Street Journal, SmartMoney and the New York Daily News. Follow her on Twitter at @cateyhill.