With a compromise in the works for the economic stimulus bill, I have decided to reflect on one of the biggest lessons learned during this recession: There is a definite disconnect between what’s good for the economy and what’s good for individuals on a personal finance level. Our economy is not based on individuals making sound financial decisions that lead to their prosperity. Our economy is based on individuals making detrimental financial decisions that lead to their enslavement by debt.

We have an economy that based in large part on consumer spending — and not just any consumer spending. Our economy is based mainly on debt-fueled consumer spending. And we’ve come to rely so heavily on this model of an economy that our leaders are telling us it’s “patriotic” to feed our consumerism — as long as we’re buying American. Indeed, nearly all of the tax incentives in the current economic stimulus bill are aimed at getting people to spend money they don’t have on stuff they don’t need. Even the individual tax cut touted in the economic stimulus bill, small as it is, has consumer spending as its goal. In fact, the reason our leaders are giving so little directly to us is because they don’t want us to save it or pay down debt. They want it to be a large enough amount that we feel reasonably good about it, but small enough that we will spend it rather than use it to our personal finance advantage.

Forget the economy; get your financial house in order

As “unpatriotic” as it sounds, I think it is time for us to force a change on our government — a government that is, at least, practicing what it preaches (borrow and spend, borrow and spend). Now is not the time to stimulate “their” version of the economy at the risk of destroying your own financial future. Instead, follow these basic personal finance rules to shore get your financial house in order:

1. Prioritize your spending. Look at what you are spending money on. Prioritize it. Make a plan. Figure out what is important to your financial situation, and spend your money in accordance with your personal finance goals.
2. Stop building up debt. I admit that I haven’t done this particularly well; I just bought a car. But it’s been more than year (when we bought our house in September 2007) since we bought anything else using debt.
3. Pay down debt. Paying down debt is always a good idea — especially right now. You want to free yourself from as many debt obligations as possible.
4. Build up savings. Building your emergency fund, as well as long-term savings, is a good plan to help you prepare for the future. You never know what might happen.
5. Check your insurance. Make sure your coverage is adequate for your needs, so that if something does happen, there’s a better chance that you won’t be financially devastated.
6. Prepare yourself for job loss. The Dems were forced to scale back their job creation hopes from 4 million to 3.5 million in the economic stimulus bill compromise. Millions of jobs have already been lost, and more are likely to be lost — even if we all go out and spent a bunch of money. So update your resume, do some networking and look for alternative income streams.
7. If you can, make some investments. If you have the available funds, make some carefully chosen investments. These can be of varying degrees of riskiness, depending on your tolerance level. Keep contributing to your retirement account (but check its holdings). Personally, I am upping my investments in companies that are fundamentally sound and have potential for future growth. I’m also looking into renewable and alternative energy related companies, since they should be getting a boost down the road.

Do you have any other advice for getting your financial house in order?

This is a guest post from Trish Wagner. I really like her take on figuring our your money mentality in order to help you change your financial behaviors.

How do you feel about money?  Most people see money in terms of black and white, either you have enough of it or you don’t.  Of course there are many levels of “have it” or “don’t” but let’s assume you fall into one of those categories. How does your attitude or feeling about money affect the rest of your life?  Can changing your attitude change your financial status?

What is your money mentality?

Your attitude toward money is formed over a lifetime of financial experiences.  It starts when you are young and can be greatly influenced by your upbringing.  Children learn from example; if your parents had a negative attitude about money or wealth you might be more inclined to mimic those feelings. Have you ever heard or perhaps spoken the following phrases in regards to money?

• This is the way it has always been
• The rich get richer while the poor get poorer
• We can’t afford that
• There is never enough to go around
• Our family has always been poor

While money may not buy happiness, it does pay for housing, clothing, food and other necessities that many people struggle daily to maintain.  For some individuals financial security is still viewed as a dream that can never be achieved.

Change your attitude to change your life

If you feel you are “destined” to be poor or that you will never have enough money to live comfortably you could likely fulfill that prophecy.  A common factor that contributes to generations of families living hand to mouth is the belief that you have to have money to create wealth.  While in theory this is somewhat true, it does not mean that you have to start out with money in order to be successful financially.  What you do have to have is a positive attitude, short and long term goals and a plan to reach those goals.  There are endless rags-to-riches stories about individuals who overcame growing up in poverty who turned their lives around. You can, too, by doing the following things:

• Believe in yourself and your ability to find success.  Nothing in life comes easily and changing a lifetime of negative financial experiences will prove to be hard work.  You must truly be ready for change and committed to the hard work required to achieve success.
• Debt is a four letter word that makes it almost impossible to achieve your financial goals.  There are several methods to get out of debt and you will have to examine your own situation to determine what method is right for you.  Whatever route you take reducing or eliminating your debt is imperative to your financial success.
• Set short and long term financial goals.  Once you eliminate your debt you can begin to focus on establishing financial goals.  To break the cycle of debt you must have money set aside in savings for unexpected expenses.  Learn about the importance of emergency funds, saving for retirement and investing.
• Do not set yourself up for failure by expecting overnight results.  Unless you win the lottery or find yourself the recipient of some other windfall, changing your financial status will require hard work, sacrifice, determination and a strong desire to improve your situation.

Keep in mind you are limited only by yourself.  Regardless of how you ended up in your current situation, you are the only person who can change the path your life takes from this point forward.  Remember: Finding real wealth is not just about financial success, but also maintaining healthy relationships, improving yourself as an individual and helping others to do the same.  If you can achieve these goals you will truly experience a life of wealth.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community featuring debt forums. Trisha writes regularly on the topics of getting out of debt and personal finance.

Right now, many people are thinking about their finances and trying to figure out how they can improve upon the situation they find themselves in. At the very least, the current economy has many wondering how they can prepare for the future — just in case.

Happily, there are a number of online financial planning tools that can help you figure out what you need to do to move forward on the path to financial freedom. Here are some of my favorite places to go when I need help making a personal finance plan:

• Bankrate.com calculators: If you are looking for calculators, this is the place to go. You can find out whether it is worth it to refinance, how long it will take to pay down debt and figure out how you can save more money.
• DebtGoal personalized debt reduction: I really like how this site helps you figure out a way to pay down debt. Create a personalized debt reduction plan, and see how quickly you can pay off debt in different scenarios.
• Instant Budget Make at CNN Money: This is a great way to figure out how you stack up with others in similar categories, and help you analyze your spending. I also really like the budget planning tools available at Mint.com.
• Vanguard financial planning tools: If you want help with creating an investing plan, or if you are trying to create a retirement plan or prepare for college, there are some great tools at Vanguard. I also really like this handy investment risk tolerance quiz that you can take at Rutgers. A must if you are planning to put together an investment portfolio that works for you.
• Life Happens insurance calculator: Figure out how much life insurance you are likely to need with this handy calculator. It comes from a non-profit together by a number of life insurance organizations.
• CreditKarma.com: Keep track of your credit score for free with help from Credit Karma. Also includes a neat Credit Card Simulator that can help you determine how certain financial decisions can affect your credit score.

Do you have any favorite online financial planning tools?

Yesterday, I wrote a post about 5 steps on the journey to financial freedom. I got this comment from Flipsem:

I understand that we all need cash reserves for emergencies but, can being a saver and being in debt be a good strategy? With interest on debt being higher than savings would it be better to pay off your debts first? What are your thoughts?

What a great point.

To some degree, this question is similar the post regarding whether or not to pay off a credit card with a CD. If you have debt that is eating away at your finances through interest payments, conventional wisdom says that it might be a good idea to pay it off quickly and then start saving. However, I still maintain that you can work toward both goals at the same time. Getting in the habit of saving is almost as important as saving itself.

In this economy, having some sort of savings is important. But it is also important to get rid of debt. Here is what I suggest if you are trying to figure out whether to build up savings or pay down debt:

1. Figure out how much extra you have each month.
2. Take 75% to 80% of that extra money, and use it to pay down debt.
3. Take the remaining 25% to 20% of that money and use it to build savings.
4. If you have a larger amount that you can put aside for these efforts, consider tweaking so that maybe you have an 85% to 15% ratio of debt pay down to building savings.

What do you think is the best course of action in this economy? Build up savings or pay down debt?

Disclaimer: I am not a financial professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. Do your own research, consider your situation and/or consult a professional before making money decisions.

Financial freedom isn’t something that you just sort of “get” at some point. Most of us have to work for it. And, the beginning of a New Year, when many of us set financial goals, is a good time to evaluate where we are the path to financial freedom. Here are 5 steps that can help you reach financial freedom:

1. Live within your means. This is the first step on the path to financial freedom. You can’t start paying down debt and building up savings until you are spending less than you earn. The very first thing you have to do is stop accumulating debt, and then eliminate expenses until you are living on less than you make. If possible, try to get by on no more than 80% of your income (70% to 75% is better).
2. Make sure you are adequately insured. Go through your policies and make sure you have adequate health, life, auto, home and other insurance. You want to be protected against the unexpected. If you need to adjust coverage, you can do so, now that you are living within your means.
3. Start paying down debt. Once you are spending less than you earn, and protected to some degree against financial catastrophe (there is no way to be completely safe, of course), you have the ability to start moving further down the path to financial freedom. One of the best ways to do this is to start paying down debt. Imagine how much more you will have when you are no longer paying interest.
4. Build up your cash reserves. You can actually start doing this while you are paying down debt. You should have a short-term emergency fund, and a long-term cash reserve that you can call on for unexpected expenses, possible job loss or some other financial problem. Using a high-yield savings account or CD laddering for this keeps things relatively liquid, and ensures that you will earn a return on your money.
5. Prepare for the future. Finally, you need to start securing your future. Retirement accounts and carefully thought-out investment decisions, as well as multiple income streams (some of them passive), can help you shore up for the future — as well as the present.

Of course, maintaining financial freedom requires that you continue apply the above principles in your life. Here are some resources to help you get going on the path to financial freedom in 2009:

Personal Dividends offers a review of money management software that can help you get things in order.

At the All Business Personal Finance Corner, you can read about a debt reduction planning tool to help you tackle your debt. Also Mrs. Micah provides the steps to starting and managing a debt snowball.

Bible Money Matters offers some insight into why goals are important. And, at Free From Broke, you can learn a great system for helping you actually achieve your financial goals.

As far as tips for the New Year are concerned, My Two Dollars has some great budgeting tips, and Stock Trading To Go focuses on 20 personal finance tips for 2009.

I also really enjoyed a post from Gather Little By Little about getting rid of old stuff now that you have all sorts of new stuff from the holidays. I think this applies to old financial habits as well (except you don’t donate those to charity).

And, finally, if you don’t know where to begin, both Cash Money Life and Money Under Thirty offer some great ideas for simple, achievable 2009 financial goals.

Do you have any tips for achieving financial freedom?

It’s the first reader question of the New Year:

I have a credit card with a $6700.00 balance,with an interest rate of 14%, have a CD which I can cash in to pay this down, CD will yield about $5600.00. Should I use the CD to pay down the credit card?  CD is paying about 3.6%

Personally, I am inclined to take the money in the CD and pay down the credit card. The 14% interest that you pay on the credit card more than cancels out the 3.6% you are getting on the CD. Indeed, you will be paying a great deal more in interest than you could earn on the CD. Savings rates are dropping rapidly in a variety of categories, including high yield savings accounts and CDs. It’s what happens as the Fed rate heads lower. In this climate, it might be best to pay down debt while you can, doing your best to free yourself from obligations. Get the credit card paid off, and then start rebuilding your savings.

My only concern is whether or not the CD has reached full maturity. You may have to pay a penalty for cashing the CD in early if the entire term of the CD has not run its course. Do a cost-benefit analysis. Even with the penalty, you may still be saving more by getting rid of the interest payments on the credit card.

Readers: Do you agree with my assessment? Would you pay off the credit card or keep the CD?

Yesterday, the Federal Reserve enacted a large rate cut. And while that may help those with credit card debt pay things off a little more easily, there is a lot more that could be done to protect consumers. And the Fed may do it.

As Consumerism Commentary reports, the Federal Reserve is scheduled to vote on new credit card rules tomorrow, Dec. 18. Here are some of the new credit card regulations being considered:

• Interest rates. This is a biggie — a real sore spot with me. Anyway, with the new regulations, interest rates would be less random, especially for those in good standing with good credit (something that irks me about Citi). Also, rates could not be raised on an existing balance.
• Universal default. Credit card companies can no longer penalize you for having a problem with a different credit account.
• Later credit card payment due date. Now, you will get 21 days instead of 14 from the credit card statement date to make your payment. This will reduce your chances of late payments, and hopefully help your credit score.
• Payments applied to higher interest first. Right now, most credit card companies apply your payments to the low interest items first (a special rate on a balance transfer, for example). Now, though, they will have to be applied to the higher interest items on your credit card bill.

In this economy, with a recession coming on, any help you can get in terms of paying down debt — and possibly having lower payments (thanks to lower and less capricious rates) — can be a real help.

Two-cycle billing is also being considered. I know that many consumers choose to use credit cards, but many practices are obscured and downright unfair. The consumer does deserve some level of protection from those who prey upon them.

Listen to more about the possible new rules for credit cards on NPR.

Also, see more on legislation affecting your personal finances at Get Rich Slowly.

What do you think about the new credit card rules?

This morning, there was a great deal of excitement surrounding a press conference that involved several officials (including President Bush) telling us all about how they are going to save our financial system from complete and utter ruin. The key is injecting more capital into banks, so that they will feel better about lending to each other, to businesses and to the rest of us. Bloomberg reports on the main thrust of the moves made today:

“We must restore confidence in our financial system,” Paulson said in a statement in Washington. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

Should you follow Paulson’s advice to banks?

As you can see, Paulson advised banks to spread the capital around. And, while this might be good advice for banks to follow, now may not be the time for you — in your personal finances — to follow this advice. It remains to be seen whether or not recent efforts by governments around the world to shore up the financial system will translate into positive economic effects for us “oridinary” folks.

So, until the economic benefits of this bank bailout (if there are any) are realized, it is probably in your best interest to disregard Paulson’s advice to the banks and hoard your own cash. Now is a good time to do what you can to build up an emergency fund and to pay down debt. Actually, this is good advice to follow no matter the economic conditions. If you are living solidly within your means, setting money aside, and working to pay off debt, you will find that you have less to fear from a recession.

About 45 minutes ago, the US Federal Reserve announced that its federal funds rate — which is the rate that banks charge each other for loans — will remain at the same low 2% it has been at for the past three months.

For people with cash investments (savings accounts, CDs, money market and the like), this is a bit of a bummer. On the other hand, people with consumer debt have something to cheer about: With interest rates remaining low, more of your credit card and home equity line of credit payments will go toward reducing your principal.

If you are working on getting out of debt, now is a great time to participate in aggressive debt reduction. Instead of eating up your payments with interest charges, chances are that you can make a bigger impact on your debt right now.

Go ahead. Make that extra credit card payment. It will help you in the long run.

image credit: sxc.hu

A post over at The Simple Dollar really inspired me. It’s ideas for preparing food inexpensively.

Learn to prepare meals at home from simple, unpackaged foods.

It’s a great money saving idea that can make you more self-sufficient, and help you reduce your expenses (thereby increasing the amount of money you have available to save, invest or pay down debt).

This post is part of the b5media Business Channel Great Blog Off! Find out more about the Blog Off here: http://www.b5media.com/b5media-blogs-for-a-cause-and-raises-money-in-support-of-charity/

The Business Channel is supporting Accion International for the Great Blog Off. You can make a donation directly to Accion (http://www.accion.org/b5media). Donations are tax deductible.