How to prepare your
personal finances for a
2008 recession
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
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