Several countries have borrowed and spent much more than they’re able to pay back. Central among them in Greece, which is in danger of pulling out of Europe’s common currency, the Euro.
Greece badly needs a bailout, but European leaders sharply disagree about the best path forward. On one side is Germany, Europe’s bankroller, who swears by the austerity measures they’ve implemented in their own country since the recession began 5 years ago. On the other side is a growing number of leaders from other countries, who believe it’s time for a different solution to the region’s troubles.
But why does this matter to us here in North America? Aren’t they across the big pond, thousands of miles away?
Here’s something you may not have considered. Europe accounts for 21% of all US exports, according to the Office of the US Trade Representative. That means over one fifth of all goods and services produced in this country are purchased by someone in Europe. If European countries and citizens are faced with austerity, do you think they’ll continue to purchase at the same pace as they always have?
A slowdown in Europe directly affects our economic situation here. With Europe buying less, companies have less need for labor, so they don’t require as many employees. Up goes our unemployment rate. Investors lose confidence that Europe will be able to cover their obligations, so stocks move lower. Down goes your 401(k) balance.
All of this causes us to consume less here, which slows down economic activity, prolongs the recession and gives companies even less incentive to hire new employees.
Another interesting trend is that policymakers have become the primary market influencers. Investors are now reacting to their perceptions of policy changes rather than economic data like retail sales and corporate profits. Because governments around the world have intervened to such an extent in the financial markets, the economy is now more dependent than ever on elected officials.
If you weren’t aware of how intertwined the global economy is, you should be now. As nice as it might be, you can’t control what goes on in other countries. Heck, we can’t even control what happens in our own country. But there are some things you can do in your own life to help you ride out these difficult and uncertain times.
Reduce the amount of debt you carry. Debt is a chainsaw to your finances. It cripples your financial health, giving your little margin for error. It requires a portion of your resources every month and gives you nothing in return. It adds pressure to meet obligations and stress and heartache when you come up short. Do everything you can to eliminate the amount of debt in your life.
Build an emergency fund. I’ve written about this several times on this blog. You need a pile of cash (preferably not stashed in the freezer) that you can rely on in a pinch. Start with $1,000 in an online savings account. Then build it to one month of living expenses, then two months and so on. This is your insulation against the bumps in life.
Watch your spending. You can make a budget, track every penny that you spend, or even put your credit cards in a block of ice. Whatever works for you. The point is to think about each purchase and how it makes your life better.
Save for your future. If your employer offers a 401(k) with a match, you have no excuses about why you’re not participating. Contribute up to the match and put the rest into a Roth IRA. Even with the markets on a roller coaster, your best chance of beating inflation is a diversified, low-cost portfolio of stocks and bonds. My favorite are the target-date funds. If you’re not sure how much you should be saving, see this post.
Who knows what will happen in Europe. But one thing is certain – it’s time to get back to basics. Following these tips helps you insulate your finances from the drama that’s playing out in Europe.
Are you worried about the crisis in Europe? What are you doing to protect your finances?
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