By Christopher C. Humes, CPA
Recessions are an economic reality. Our economic history is one of growth cycles and contraction cycles. Our last recession officially ended in 2009, but because it was so deep (“The Great Recession”) its effects lingered and unemployment remained persistently high for several years. At the time of this writing, there are a few economic signals of a recession approaching in the not-too-distant future. When the next recession happens and how long it lasts are beyond the scope of this column; just understand we will have another one. Will you be ready?
In this blog I will discuss some practical financial ideas that make sense in both good times and bad.
Rainy Day Savings
Establish a rainy-day savings fund right now if you don’t have one. Many financial professionals advise having a cash cushion of three to six months of expenses in savings. For many, this can seem daunting. Unless you are making “every nickel scream,” most people can find some fat in their monthly expenditures that can be trimmed. Saving some of this discretionary spending can quickly add up to help reach this goal.
Make your rainy-day savings a goal that you will work on over time. It probably won’t go exactly as you plan. It’s OK if takes a year or longer to reach this goal. To get started, develop a household budget. There are numerous low-cost (and even free!) budgeting and financial software tools that are available to track your assets, liabilities, and income/expenses. Be realistic with your budget, and be sure to factor in the inevitable: car repairs, appliance replacement, out-of-pocket medical bills, and so on.
I could devote pages to this topic, but here are a few suggestions:
- Skip meals out and pack a lunch.
- Skip Starbucks and brew your own coffee at home and take it to work in a travel mug.
- When dining out, skip the appetizers, drinks, and deserts that quickly add to the bill.
- Buy clothing at discount stores, surplus, and thrift stores. Gently worn clothing is also available at numerous online resellers.
- Squeeze an extra year or more out of your car, and when it’s time to buy the next one, skip some of the bells and whistles. Buying a used car can save thousands of dollars, and resources such as Consumer Reports can help you make a good deal and find makes and models that have reliable repair histories.
Credit and Credit History
Credit is a valuable backstop in both good times and bad. Establishing and maintaining a good credit history through the judicious use of credit and credit cards is vital. If you are just starting out economically, you can best establish this history and increase your credit score by making small purchases and paying off the balance in full each month. A good credit score will qualify you for lower interest rates and higher credit limits. Make use of promotional rates or zero interest rates that are available when it’s time to replace furniture or appliances. Remember to make all your monthly payments and to pay these in full before the promotional rate and periods end.
If you are a homeowner, consider obtaining a home-equity line of credit for major home items, such as a roof, furnace, or air conditioner. You will surely have a much lower interest rate on this type of debt than with a credit card. Remember, though, this comes with a lien against your home. Do not use home equity as an ATM to enhance your standard of living.
Make Yourself More Valuable to Employers
Many employers struggle to find good, reliable employees. Make yourself more valuable by asking for additional responsibilities and assignments. Add to your skill set. Update your résumé and be ready to find another job if your current employment situation is tenuous or your employer experiences a downturn and needs to cut employees. Consider taking a part-time position (be sure that it doesn’t conflict with your primary employment). It may turn into an opportunity if your current employer needs to downsize its workforce. If you have a hobby, consider ways to monetize this into an additional source of income.
Review Your Investments and Retirement Assets
The stock market has been on an upward trajectory for most of the past 10 years since hitting bottom in March 2009. Your investment mix of equities and fixed income investments may be out of balance with the rapid growth in equities these past years. As we get older and closer to retirement, the mix of equity and fixed-income investments should be adjusted accordingly. Do not try to time the market by making significant changes to your portfolio. Your investment portfolio should reflect a long-term plan, keeping in mind that the market can overreact at the first sign of bad news.
Recessions are a fact of our financial life. Having a detailed picture of your finances and a plan in place to deal with a recession can help you weather a financial downturn. Developing a plan and establishing financial discipline are the keys to a successful financial life. Having a savings cushion for short-term interruptions to one’s income stream or unexpected expenses is the base upon which one’s financial health should begin. The old saying “Cash is King” is never truer than during a recession. Consider using budgeting software and tools to assist in this endeavor. If this all seems too daunting for you, a CPA or certified financial planner can help you develop and monitor a plan for all phases of the business cycle.
Christopher C. Humes, CPA, is a senior manager at Baker Tilly Virchow Krause LLP. He is a PICPA member and serves on the CPA Image Enhancement Committee.
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