Hope for the Best but Plan for the Worst

Many have felt the grips of what looks to be an economic recession in the making. Gas prices are skyrocketing, the housing market is falling, and the government is giving away money – if that doesn’t scream “recession” then nothing does. Some economists proclaim that a recession can be avoided while others insist we’re already in one. If the experts can’t agree, then how do we know when we’re there?

A recession is determined by the gross domestic product (GDP), which is the total market value of the final goods and services produced in the U.S. When this number decreases for six consecutive months, by definition, we experience a recession. Simply put, the U.S. is losing money and the economy is shrinking rather than growing. This can cause some serious concerns for many people, not the least of which is job security.

We may not be able to predict when a recession will occur, but there are ways that you can prepare for one and keep any short-term losses to a minimum. After all, the axiom that it’s better to be safe than sorry was probably first uttered by an economist.

There are four main areas affected by a recession.

Number one: Investments and Savings

A recession tends to cause market prices to fall, thus creating short-term losses for those invested in the market. When sitting with a financial advisor, it is important to build your portfolio based on your goals and risk tolerance because there may be situations where it is in your best interest to just ride out any market downturns. The younger you are, the better this is for you as you will have more time to recoup any losses.

One strategy for weathering market drops is to diversify your portfolio among different asset classes. According to many financial experts, including Charlie Massimo of CJMFiscal Management (as reported by Consumerreports.org), this diversification strategy can help protect you from all of your investments going down at the same time.

You should be talking to your financial advisor every six months anyway to make sure your goals haven’t changed, but if it’s been a while now is the time to schedule those appointments. Talk to you advisor about some other approaches to help you deal with market volatility, specifically those related to a recession.

It’s no secret that the national savings rate in the U.S. has been on the decline the last three decades.  In the 1970s people saved close to 15% of their income; in the 80s that number dropped to anywhere from 5-8%, and now the figures fall below 0%. That says that American’s are simply spending more money then they make and there’s nothing left over to save. But savings is important during a recession because if you lose your job, you need something to fall back on.

A typical emergency fund should be three to six months of your monthly expenses, saved and kept in a liquid account such as a money market where your funds can’t lose value. If you lose your job during a recession, you’re not totally without funds and you have a little room to maneuver until you find another job. You may think saving this amount of money is too difficult to achieve, but the reality is that you can do it and now’s the time to start. Begin with a small amount, like $5 or $10 every week. Surely you can cut an extra $5-10 by foregoing that Starbuck’s coffee once a week or by bringing your lunch rather than eating out. You’ll be surprised by how quickly it adds up.

Housing

The housing market has gone down quite a bit as of late and the sub-prime fallout hasn’t helped matters any. Even so, there are a few things to keep in mind that will help while the economy is uncertain.

Don’t sell if you don’t have to. It’s not a seller’s market right now and trying to sell if you don’t need to may not be in your best interest financially. With home values dropping and foreclosures increasing, buyers get their pick of the litter, so to speak. A seller isn’t going to buy your house when others in the area are asking for less.

If you do have to sell, be flexible. As mentioned above, sellers have a lot more bargaining power during a downmarket. Be prepared to take a little less in order to sell the house.

If you’re buying, be sure that you don’t overextend yourself. While it’s a great time to buy a home, what with interest rates dropping and the prices on homes falling, overextending yourself financially can put you in a bind if things go from difficult to worse with the economy. Keep your eyes open for a good deal, but don’t jump in head first without considering your options and their consequences.

Borrowing

If there’s any good news to a recessionary period it’s that interest rates tend to drop. This is done on purpose in hopes that people will take advantage of the lower rates and actually borrow money thereby stimulating the economy. What this means to you as a consumer is that now’s the time to fix any variable rates or refinance your home if you were planning to do so.

As of this writing, several banks and credit unions are offering fixed home equity rates as low as 4.99%. This may be a good time to combine all of your unsecured, high-interest debt into one low-interest, tax deductible payment. As you want to get rid of as much debt as you can before a recession hits, taking out a home equity loan may provide you with the best solution to your situation. If not, then be sure to work on lower your debt so you don’t feel the crunch later on.

Employment

When a recession hits, layoffs are inevitable. But, there are things you can do to help protect your position with the company.

Get additional training. Diversify your skills as employers are less likely to lay off people who can do more for the company. Take additional training courses or go back for your Master’s if you’ve been considering it. Companies tend to keep people who can do more than one job, i.e. an engineer who can also manage a sales staff or vice versa.

Network! This is important to start now while you’re not looking for a job. No one wants to be known as the guy who comes around only when he needs something, and you certainly wouldn’t be fond of someone who did it to you. Call up any old bosses or coworkers and let them know how you’re doing or invite them out to an informal lunch. Keep in contact with clients or associates in a broad professional network, that way you have lots of options if you’re ever laid off.

Update your resume. Make sure all of your ducks are in a row so that if you are laid off, you can hit the ground running and hopefully find another job before you’ve exhausted your emergency fund.

If you take the necessary precautions now and a recession occurs, you won’t have too much to worry about. Your assets will be protected, your credit will be in tact, and your family will be provided for. There’s no better peace of mind then that.

Related posts:

1. Why America NEEDS a Recession
2. Deposit Insurance: Recession-proof your savings
3. Watch Your Back: 8 Up and Coming Credit Card Fee-Creep Tricks
4. Frugal Living Tips for a Recession
5. Good Debt vs. Bad Debt