Five Steps to Avoid Financial Disaster (Inflated Expectations, Part 2)

[Continued from part 1] I have no idea how the United States will or can get out of the economic mess we've spent the last 50 years getting ourselves into. As individuals, though, we can take steps to avoid disaster.

1. It's time to stop thinking that rescue is on the way. The government doesn't have the will to do it: our elected representatives are afraid that facing the facts would mean losing elections and losing lobbyists' dollars. The "invisible hand" of the market won't do it: the all-too-visible hand of greed is too busy sending more wealth to the already wealthy. The magic of compounding can't do it: inflation, brokers' fees, cyclical bear markets, and investor panic conspire to keep most of us from getting ahead of inflation.

2. We need to stop thinking that the last 10 years are an exception, and that happy days will soon be here again. There is little reason for optimism in a nation that is, corporately and individually, leveraged way beyond its resources, producing little in the way of hard goods, rapidly aging, and responsible for over half of the entire world's military expenditures.

3. It's important to be realistic: most of us are not going to be able to work forever, and we are probably going to have to provide for a major part of our financial needs in retirement. Use the magic of compounding interest to counteract the dark magic of inflation. Sock away as much money as you can in accounts that are likely to outpace inflation. Every year, save every dollar that the government allows you to save tax free. In 2010, you can put $16,500 in your 401(k) if you're under 50, $22,000 if you're 50 or older. If you can, add a Roth IRA for each adult, employed or not, and save another $5,000 or $6,000 apiece each year.

4. We've got to start being rigorously honest with ourselves about wants vs needs. This much saving may be impossible, and if you haven't got a ha'penny, then God bless you. But when we're looking for housing, for example, it helps to remember those two- or three-bedroom, one-bath, 1200 square foot houses of 1960. When we're looking for cars, we might remember days when one-car garages were standard and teenagers walked to school. When we're looking for higher education for our kids, we might consider community or state colleges. And on a smaller scale, we might question the wisdom of buying restaurant meals, expensive cable TV subscriptions, gym memberships, fine wines, and other luxuries unknown to our parents and grandparents.

Many years ago in a town far away, we lived two doors down from one of those modest houses. Its owners were a lovely young couple, both professors. When they discovered they were going to have a baby, they decided they needed more space. They sold their little house to another lovely young couple -- with four small children. The new owners were very happy with it.

I'm thinking about happiness, space, and things because Mr. Neff and I are in our 60s, and when we retire we are probably going to have to downsize even though we've been living frugally and saving maniacally for several decades. This is going to be interesting, since people move into our townhouse neighborhood in order to downsize. But hey -- people pay big bucks to live in New York apartments the size of closets.

People in other countries get along in smaller quarters. The average home in France is 112.5 square meters (1211 square feet); in Italy, only 81.5 square meters (877 square feet) -- and the French and the Italians have a well-deserved reputation for enjoying life.

5. Which brings me right back to the prescription I gave several days ago: Save like hell, and figure out how to arrange your furniture attractively in a one-bedroom apartment. I think this is realistic. Is it pessimistic? Not necessarily. Money is nice, but it doesn't buy happiness. And if you end up saving more than you need, you can always endow a charitable or educational or cultural institution.

LaVonne Neff is an amateur theologian and cook; lover of language and travel; wife, mother, grandmother, godmother, dogmother; perpetual student, constant reader, and Christian contrarian. She blogs at Lively Dust.