Recession Proof Your Life Part 2

Part 2 of my 5 part series on Recession Proof Your Life contains a variety of guidelines on what you can do to protect your finances and manage the money you have when the economy is looking grim. In Part 3 we will discuss how you keep the income coming in so you actually have money to manage (and buy food, shelter, gas … things like that which we have become used to).

There are 8 different things to do to manage and protect your current financial situation.

1. Set Up an Emergency Fund. Most financial advisor recommend having three to six months’ worth of living expenses held in savings or a money market account. In the event that you lose your job (we’ll talk about how to avoid that in just a little bit), you don’t want to end up tapping your investments or relying on credit cards. For most people, it’s pretty hard to put the money away all at once (and even harder to keep your hands off of it). If you do a little at a time, adding to it no matter what, you’ll sleep better at night knowing that you have a cushion. This is no different than the ongoing philosophy of ‘paying yourself first’ that you hear with regards to saving money for the future. Except now you really need to do it.
2. Want Less. Unfortunately, Americans have been used to spending beyond our means for sometime now. The “use the house as a piggy bank” trend went on for way too long with the availability of cheap credit, cash out refinancing and home equity lines of credit. We’re paying for it now with the collapse of the housing market and the subsequent ripple through many sectors of the economy. Implementing a ‘want less’ strategy does not mean you need to deprive yourself of fun and games in your life. Maybe you go out to dinner twice a month instead of once a week; maybe you get a latte every few days instead of every other day. Buy TWO boxes of Girl Scout cookies instead of EIGHT.
   
3. Reduce Your Debt. Reduce your debt — and the possibility of going further into debt — as much as possible. This is related to the suggestion above (want less). If you have a lot of balances on your cards, save a little extra each month to pay off the lowest balance. Then the next highest balance and so on. You are saving yourself 18+% a year in doing this - a fantastic return if it was an investment. After you pay these suckers off, get rid of all of your credit cards except one. Some people will tell you to reduce or leave them at home. I say get rid of them all. It doesn’t matter where you go, just about anywhere will take MasterCard or Visa (despite the latter company’s ads to the contrary). If you don’t have them, you can’t use them. If you have a business, then it is likely you have a credit card for that and this is an obvious exception. Do you want to be rich? Then you should ultimately have your own business. See Part 4 of this blog series (coming soon!).
4. Rent or Buy? If you are currently in the market for a new house, you have to ask yourself a few questions. It’s a little different for a first time buyer versus someone already in a home. In either case, the first question is: do you have to move? If this is a job relocation, or hardship (getting foreclosed on comes to mind), then yes, you have to move. If you have a house, be prepared to grimace all through the listing and selling process. The market is down and will continue to be that way for quite awhile, easily into 2009. Next, figure out if you are going to be in your new house for at least five years, you are better off considering buying now than trying to time the market. Trying to time any market is very tricky and even the pros get burned. Real estate is the classic cyclical market - as long as you have enough of an investment horizon, buying a house during a recession can turn out OK.
5. About to Retire? Adjust Your Portfolio. Baby Boomers and others who are on the verge of retirement should be making adjustments in order to avoid pulling too much out of their portfolios in the first year of retirement. This is particularly true when the stock market is down. Retirement today can easily last 30-40 years; people saving for retirement should have a portfolio mix of cash, bonds and stocks. Personally, I think the idea of retirement needs a tune up. To retire, you first have to be going to work. Ultimately you don’t want to work anymore (that’s sort of the idea behind retirement if I’m correct). What you need to do is figure out how to get paid for what you would otherwise do for free. If you love what you are doing (remember, that’s why you’re doing it for free!), it’s not work and you can’t retire. You just go on to the next fun thing.
6. Invest in Yourself, Your Career, Your Future. Spending money for additional training to switch careers or bring your skills up to date is a great investment. You can often do this in your current company. Organizations are more and more clear that certain employees are worth far more than they are paid and ongoing training and education is something you can expect of any decent sized company, certainly in a salaried position (plenty of examples of hourly jobs where this applies as well). If you want to change jobs or industries, there are some such as nursing where demand for skilled work is so high that employers will pay for your training.
7. Invest in Consumer Staples. If you have investments (e.g., stocks, mutual funds), put them into items and services that people need to spend money on, regardless of the health of the economy. These are the kinds of things that traditionally do well during times of recession. Companies involved in health care, utilities and indispensable items such as laundry detergent, diapers are good examples. Many people will argue that alcohol and cigarettes are good investments: when times are rough, people tend to lean a bit more on their vices and addictions.
8. Avoid Retail and Financial Sectors. These markets were really creamed in 2007, and as of 2008 aren’t doing any better. Even though it’s likely there’s money to be made here in the long term (witness the foreign investments coming in the talk about buyouts, i.e., Bank of America’s interest in Countrywide), this is not a sandbox to play in with your retirement money. Investors who don’t have the stomach for dynamic market turns and other volatility should avoid these sectors.

Just as a side note, advising you to ‘avoid financial sector stocks’ now is like telling you not to put your hand on a hot stove. The great thing about this (as noted in the intro) is that I originally wrote those words in January of 2008, months before the fall of Bear Sterns.  Same with saying ‘the market is down and will continue to go down’ as I noted in number 5.  Dang!  I sure wished I bought more of the bear market funds (they go up when the market goes down, e.g., ticker symbols SDS, TWM and others).

My ego requested that I let you know how smart I am!