Tuesday, March 11, 2008

How to Prepare for a Recession

It is likely that the U.S economy is heading towards a recession in 2008. We may even be in a recession now. But what does this mean to you? Are you prepared for a recession? How do you survive in an economic downturn? In my opinion, if you aren’t prepared for the current recession, it may be too late. So start now and prepare yourself for the next recession. That’s exactly what I did.

The last recession in the U.S started in March 2001 and ended November 2001. I was not prepared. I nearly lost my job. I had a very small emergency fund. I had debt. I had a mortgage. I had a family to support. I was stressed and worried. As Harry S. Truman said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.” Fortunately I didn’t lose my job, but I vowed to never put my family in that position again. Below are the steps I took to prepare myself for the next recession.

I improved my job security. During the last recession, my company had several rounds of layoffs. To make the situation worse, the small community I lived and worked in had very few other professional opportunities. Rather than leave my company, I found an opportunity in a different department and relocated to a major metropolitan area. This allowed me to stay with my company and protect myself from future downturns. I still work for the same company and I’m very happy with the moves I have made.
I paid off debt. The only debt I had in the last recession was two car notes and a mortgage. But I also realized I would default on these loans quickly if my income suffered. I no longer have debt other than a mortgage.
I downsized. I downsized from two vehicles to one. Surprisingly, sharing vehicles with my wife is only a small inconvenience. My home is also much more affordable after relocating a second time.
I cut spending. I haven’t gone overboard but I’ve always been frugal. I’ve rejected temptations to spend on large ticket items. I've also avoided the "Keeping up with the Joneses" mentality.
I built an emergency fund. My emergency fund during the last recession would have went dry after only one month of unemployment. Due to my downsizing and spending reduction efforts, my emergency fund is now comfortably more than one year of living expenses. This might be a little extreme, but it feels comfortable and I’m currently earning approximately 5% on this money.

I recommend my readers take the necessary steps to prepare for the next recession. Start today and don’t panic. Put an action plan in place and work diligently to make it happen. Be consistent and practice patience. My plans took several years to come to fruition and it’s always a work in progress.

I’d like to hear what others are doing to prepare for the next recession. Please feel free to comment.

5 comments:

Jill H said...

We don't buy things unless we can pay for them right away. We paid off our mortgage. What we are paying at the bank now holds collatoral and can get us loans which helps when we really need it. The biggest expense is the business which makes money and is tax deducted. We use 0% credit cards and transfer balances when the offer expires. We only buy used cars and don't feel it neccessary to be lavish. We don't care to shop, only for the neccessities. We are lucky to get hand-me-downs which are as good as new and seek out garage sale finds to quench the need to shop. Are assets far exceed our debt.

Kristen Zirkle said...

How did you save a year's salary? Just by saving every month or did you get there by cashing in on other equity (home, etc)?

T Struck said...

Kristen,

My emergency fund isn't one year's of salary. It is one year's worth of living expenses. I spend less than I earn so these two figures are not the same.

The most significant impact to building my emergency fund came when I relocated from Minneapolis to Houston where the cost of living is significantly less. Yes, I did take some equity out of my home. Approximately 25% of my emergency fund was built by taking out equity. But if everything goes as planned, I should have our home completely paid off in 5 years. Also, the overall cost of living in Houston is less than Minneapolis so my dollar goes further on a daily basis.

The remaining 75% came from diligent saving and downsizing. When I downsized to one car, for example, the proceeds from the car went directly into my emergency fund. In addition, I haven’t had a car payment in over a year, which helps my cash flow tremendously.

TC said...

Do you mind telling us where you are getting a 5% return on you emergency fund money?

T Struck said...

TC,
Most of my emergency fund is laddered in CD’s currently averaging 5.10% yield with ING Direct. My last CD is set to mature in January 2009. I locked into these rates before our friend Ben Bernanke cut the Fed Funds rates and penalized us savers!

Since the ING Direct savings account is currently yielding only 3.1%, I plan to move my cash to Vanguard’s Tax-Exempt Money Market Fund (VMSXX). The current yield is 2.94%. If you are in the 25% tax bracket, this is equivalent to a yield of 3.92%.

I wrote about my plans last week in my post Stash Your Cash in Tax Exempt Money Market Funds.

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