(This is a guest article by Melanie Taylor*)
It’s hard to open a news site or newspaper without hearing more about the economic woes besetting the world in general and the States in particular. From credit crunch to housing crisis, it seems like everything that could go wrong now officially has. It’s no wonder the airwaves are full of heated debates disputing the meaning of the ‘R’ word, and whether or not we can officially use it (yet).
A recession might not be ‘real’ until we’ve seen two consecutive quarters of decline in real GDP, yet plenty of individuals started suffering long before the economy as a whole. Regardless of the nation’s communal health, the real question is this: “What’s my financial situation – and how can I improve it?”
There’s always something you can do (basically earn more & spend less) to improve your finances, and it’s always a good idea.
At a time like this, it’s simply more important.
Rule 1: Use it wisely
You may be tired of hearing the word ‘budget’, but money management is more important than ever during times of economic uncertainty. So figure out your income and expenditure. Spend a month writing down everything you spend. This can deliver three benefits – practical, psychological and motivational.
- Practical. Everyone wastes some money – it’s just a question of how and how much. Pinpoint where you’re wasting money and you’ll know what to do.
- Psychological. Doing ‘the wrong thing’ is always harder when someone’s watching, even if it’s only yourself. If you find that ‘self-auditing’ helps keep you on the straight and narrow, keep it up – when your debts are paid off and today’s problems are a distant memory, this could be the key to saving for retirement.
- Motivational. Calculate how much you could save in three months, or in a year – there’s nothing like multiple zeroes to inspire an economy drive...
Now use that calculation to figure out how much faster you’ll be able to pay off your debt, and how much interest you’ll be saving. The sooner you clear your debts, the sooner your money will be your money again, to spend or invest as you see fit.
Rule 2: Don’t panic
Trading down – either property or cars – can be a good idea and save you a fortune in the long run. Just make sure you don’t:
- Overreact. Don’t sell your $250,000 house because you need $5,000.
- Mistime your reaction. Don’t, for example:
- sell property during a property crash – there may be alternatives, such as renting it out and moving into a smaller property yourself.
- sell shares when they’re down – if they’re worth $500 now and might be worth either $0 or $5,000 in a year or two, isn’t a $4,500 profit worth risking a $500 loss?
Rule 3: Careful what you borrow – and how
There’s nothing wrong with debt per se. ‘Healthy’ debts can more than pay for themselves: your mortgage might be your ticket to property-boom profits, for example, or your car loan might be your only path to a better-paying job.
‘Unhealthy’ debt, on the other hand, can lead to a miserable existence that’s the exact opposite of the picture painted by adverts of smiling people waving credit cards at shop clerks. As a general rule, credit cards are fine if you use them because they’re convenient – and pay them off a.s.a.p. – but once you start using them to borrow money, you’re running a real risk of entering a ‘debt spiral’.
So if a slowing economy means you’re faced with short-term cash flow issues, remember there are better ways of dealing with them. Just three ideas:
- Talk to your mortgage provider about taking a payment holiday (a short break from making mortgage payments).
- Cut out luxuries altogether until you’re back on track.
- See what you can sell to raise cash.
If you’re just a few dollars short, you may be able to find it elsewhere, without resorting to credit cards.
And if you’re faced with a serious shortfall, then borrowing a lot on your credit cards is almost certain to lead to serious interest charges, especially when lenders are reacting to economic problems by raising interest rates.
Rule 4: If you need debt help, get it!
There’s no shame in asking for help with your debts. If you’re frightened that people will think you’re a fool for being in debt, how much more foolish would it be to let that fear deter you?
The kind of help you need depends on your situation: your existing debts, your current finances and your future earning potential.
- You might just need some advice from a seasoned professional – someone who understands how budgets work, how lenders think, how repayment plans are calculated…
- Or you might need a professional debt solution. Talk to a professional who understands the various solutions available and can advise you on which one would be best for you. Make sure you find a company that offers a range of solutions so you won’t feel they’re pushing you down a path that isn’t appropriate.
Rule 5: Remember you’re an individual
Finally, remember you’re not the USA. Your finances and the country’s are not inextricably linked.
A few tips.
- Threats: prepare for the worst
- Do whatever you can to stand out at work – take night classes, volunteer for special assignments, do overtime...
- Cut your spending to an absolute minimum and save – if you do lose your job, you’ll need this safety net.
- Read the papers. If your company’s in trouble, don’t be the last to know.
- Keep your eyes open for alternative employment, whether you’re just establishing a Plan B or convinced that your job / company is doomed. Just don’t forget the ‘last in, first out’ rule – unless you’re confident about the new company’s future (and your own in it), making yourself the ‘last in’ could be a terrible move.
- Opportunities: hope for the best
- Think about moving into a ‘recession-proof’ industry that does well in troubled times (food, for example, medical services, energy provision or debt collection)
- If you’re in business, be prepared to seize the market share that’s freed up when competitors go out of business.
- If you have a bit to invest, keep an eye out for shares that have come down in price because of today’s troubles. If a big company’s shares have fallen from $5 to 50c, there’s a good chance they’ll be back at $5 in the not-too-distant future. It might be best to spread your bets – rather than buying $2,000 of share in one company, buy $200 in ten companies.
- If you have a lot to invest, do your homework and look out for cheap property.
Just as some people suffer more than average from a (potential) recession, others suffer a great deal less. Plenty of people buck the trend altogether and do as well as usual – or better. There’s a lot of luck involved, but there’s also a lot of skill…
*About the author: This article was contributed by Melanie Taylor, of GregoryPennington.com, a debt management specialist.
*Image Credit: Photograph by lemonjenny [via Flickr Creative Commons]