Looking back over the last 50 years, housing downturns have
usually signaled pending recessions. Now with the first
employment drop in 4 years, stock market fluctuations and
the credit crunch many wonder if we may be headed that
direction again. Wall Street bulls, or those who have a
positive outlook, hope that strong global economies will
keep things on an upward track.
To a great extent, our economy rests on the shoulders of
the strength of the American consumer. If we are able to
continue spending, many corporations may report positive
results, which will buffer negative downturns. However,
the consumer may be running out of steam when you consider
the low savings rates, high level of debt, home
foreclosures and consumption of home-equity coupled with
stagnant home prices.
Tips for Financially Challenged Individuals
Those in financial difficulty are more susceptible to the
affects of a recession, because they probably don't have
adequate savings or the ability to borrow more without
risking financial disaster.
Negative financial circumstances can come at any time such
as a major car repair or large health bill that isn't
completely covered by insurance. But, if a recession were
to occur there is a greater likelihood of other
consequences such as:
• Corporate cut-back
• Difficulty obtaining credit
• Smaller wage increase
• Bonus reductions
• Inability to sell real estate
• Less overtime pay
• Slow sales and lower commissions
Prepare don't panic. Prepare instead in case you are
thrown a financial curve ball. If you prepare, you will be
better able to face financial challenges when (not if) they
come.
"What can you do?"
• Delay large purchases: you may want to put off
purchasing the new car or going on a big vacation. You can
always buy the item later, but you usually can't take it
back. This particular tip could potentially save tens of
thousands of dollars.
• Accumulate money in savings or rainy day funds so that
you don't have to pull money out of retirement funds,
borrow, or fall behind on payments during a hardship.
Savings can be invested in a money market account earning
around 5%, which isn't great, but much better than paying
18% on a credit card for emergencies.
• Develop and follow a budget and limit discretionary
spending. Utilize good budgeting software to track all of
your expenses. This way you can see if you are
overspending in any particular category.
• Avoid unnecessary smaller 'want' versus 'need' purchases.
For example, your cell phone contract may be due to renew,
opt for the free or low cost phone and avoid the
multi-media entertainment devices unless internet and email
is a must for your business.
• Save on gasoline by combining trips, car pooling and
public transportation.
• Spend wisely by becoming a student of money saving
techniques: There are many excellent authors to help you
save money such as Mary Hunt and money saving blogs that
provide a whole host of money savings tips. Budgeting,
limiting unnecessary purchases, and spending wisely can
save you a few hundred dollars per month to help you build
up your rainy day fund - all with little sacrifice to your
standard of living.
• Develop your long-term goals. Having written goals and a
mapped out plan of action puts your spending into the
proper perspective. To get started list 10 things you want
to accomplish, these goals can be things you want to
achieve now or in the future. Secondly, get a financial
plan. If you can afford to, consider hiring a financial
planner. Not everyone can afford a financial planner, and
some people prefer to do it themselves. Today there are
more resources available than ever to help you do a lot of
it yourself.
Tips for Financially Healthy People
Some people are naturally good financial managers or
perhaps have not faced financial setbacks. If you are in
this category, have a firmly established financial plan,
excess income and savings - recessionary times provide
opportunities that you may want to take advantage of.
• Become self-employed and or buy a company. Are you an
experienced business person, with great ideas, work ethic
and contacts but burned out in your corporate position?
Owners facing recessionary times may want to retire or
avoid enduring an economic downturn. Your ideas may
breathe new enthusiasm and life into a business. Seek
qualified legal and tax counsel to steer you through the
transaction process.
• Purchase discounted large items: auto manufacturers are
already beginning to offer buyer incentives.
• Invest: don't try to time the market by moving out of
stock mutual funds, but stay with the proper asset
allocation (that fits your risk tolerance and return
expectations) between stocks and bonds funds regardless of
short term economic forecasts. When stock values decrease
you get more mutual fund shares for your money. You will
enjoy great appreciation when the stock market goes back up.
• Purchase real estate. Real estate purchased for
investment purposes should always be for the long term
since it can be costly to own and difficult to sell,
however recessionary times may provide opportunities to
purchase property which has gone down in value.
If you are wise and plan accordingly, recessionary times
should not affect you deeply. Plan now and make good
decisions. Regardless of whether we enter a recession or
not, proper planning can help prevent a financial disaster
and hopefully increase wealth. Remember, the best years can
be ahead for those who correctly gauge the signs of a
recession, take control of their finances, and seek ways to
grow wealth regardless of the financial climate.
----------------------------------------------------
Kent Irwin, ChFC, CLU, CAP, co-founder and CEO of
eFinplan.com. Kent can be reached at kirwin@efinplan.com.
eFinPLAN is the first and only web-based comprehensive
consumer financial planning software designed for people
who are trying to do a lot of their own financial planning
at http://www.efinplan.com
