~ Andrew Beattie
Economic conditions can be as temperamental as the weather. In this article we’ll look at some simple steps that can help keep the financial boat afloat during an economic tempest.
Batten Down the Hatches
Warren Buffet derides management that embarks on cost cutting, as good management shouldn’t need to be prompted to control costs – that should be second nature. People are less strict with their personal finances than Buffet is on management, but a downturn quickly provides the motivation needed for cost consciousness. There is always room for cutting frivolous expenses, or at least substituting them with cheaper alternatives. This applies to everything from the morning coffee to landscaping the backyard.
Set in Stores
Even if you have creditors banging on your door and ringing you at work, your first priority should be building or augmenting your emergency fund. When money is consistently flowing out of your bank account leaving a near-zero balance, there is no cushion for unexpected and unavoidable expenses – like a root canal or a new radiator. This forces people to take on yet more debt to make ends meet, and the outflow of cash worsens until it seems like they are working just to satisfy their creditors. The better alternative is to make minimum payments on your debt while building a cushion of at least one month’s wages, but preferably 3-6 months.
The larger the emergency fund, the more secure you’ll be mentally and financially. With three or more months in reserve, it takes a pretty big emergency to shake things up. Building the fund should take precedence over investment as well as debt payments. Any automatic investment plan should be put temporarily on hold and that money funneled towards the emergency fund to help speed up the building. It may feel like you’re dodging creditors and robbing from your golden years, but with a proper emergency fund, you’ll be in a better situation to consistently make payments on your debts and regularly invest no matter what happens in the future.
Patch the Hull
When the general market is choppy, there is almost daily coverage of where the hot money is going. Investors rush out of cash and into bonds; out of bonds and into stocks; out of stocks and back into cash and bonds, and on and on. Rather than getting caught up in the stutter-step of fast money, most people would benefit far more from paying down existing debt than finding safe havens to park idle funds.
If you are holding debt during a downturn, paying it back is one of the few places where you can put your money that will guarantee a return no matter what the market is doing. The return on paying off a 5% loan is, of course, the 5% you are no longer being charged. With some credit companies charging in the high teens and twenties, you’ll likely outstrip the S&P 500 and your own portfolio simply by getting that future interest off your books.
Check the Charts
When the economy is disrupted, the value of stocks in your portfolio will also be whipsawing. Although you don’t want to make rash decisions during economic downturns, recessions and slumps are very informative on the whole. In good times, mediocre and even weak companies can prosper, so hard times act as a baptism of fire for all stocks. Therefore, there’s a lot to be learned from how a company reacts to a downturn. Companies that continue to profit – or at least lose money at a slower rate – in a downturn can often take advantage of depressed prices to expand their businesses and snap up assets on the cheap.
Cash on hand, much like your personal emergency fund, is one measure of how vulnerable a company is when profits slump. Companies that perpetually overextend themselves in good times are easy to spot, as they languish and burn up their cash reserves in hard times. If you already have a regular schedule for checking into your holdings, don’t change it because of an economic dip. Do, however, note how they are handling things and whether or not cash reserves are being used up. If you still like how a company is acting, it’s a good time to get more on the cheap. If the downturn has uncovered some dogs, then why hold on when you could do better things with the cash that’s tied up?
Conclusion
One of the biggest temptations is to reverse all your preparation when the economy recovers. Economists sometimes call this spending binge “pent up demand.” As things improve, there seems to be less need to have large amounts of cash in reserve, or to keep to a strict budget. There is also a tendency to mindlessly push money back into the market to make up for lost time and value, sometimes leading to an echo bubble. If, however, you can continue to run a tight financial ship, you’ll find that your superior reserves, cost consciousness and contrarian thinking will keep you sailing smoothly in all manner of economic seas.
Here is the original:
Four Ways to Weather an Economic Storm
-Â Sandra Simmons
Does the current economic crisis have you worried? Are you wondering how achieve financial freedom so you can protect yourself and your family from the coming financial crash? Here is what you need to know.
The first thing you need to understand is what the word economics means in terms of thinking about your family, and how you can use what it means to your financial advantage.
Forget what the media says about economics when they talk about the roller coaster ride of the stock market, supply and demand, inflation, banking industry mortgage defaults and the unemployment rate. Those are ‘economic characteristics’ that measure an area much larger than you can control.
What you can control is your own household economics. The definition of economics I am using is the original one; meaning “the art or science of managing a household or business.” And that is something that you, as an individual, can control.
There is an art to managing a household. It takes having certain skills and abilities, like organizing things so they run smoothly. There is a science of managing a household, especially in the area involving money. Here is what you can do to make sure that the economics of your household are strong and stable, even though the economy of the country may be on the slippery slide to financial disaster.
1 – Spend Less Than You Make
Take a lesson from your parents or grandparents who made very little, but lived very well. Keep expenses down to a level below what you bring home in your paycheck after taxes. The fastest road to financial disaster is spending more than you make. It’s possible to maintain your quality of life while cutting optional spending. This can be done by doing something as simple as renting a movie and making popcorn at home instead of going to the theatre, to buying a new used car instead of a brand new car.
2 – Pay CASH
Every time you purchase something using credit cards that you cannot pay off as soon as the statement arrives, you are committing your future earnings to the credit company. Those future earnings will be needed to pay your regular household expenses, so you end up in economic slavery known as the credit trap. The exception is purchasing property that increases in value, such as buying a home or investing in a commercial building that puts more income in your pocket.
Tip: When paying with cash; negotiate a cash discount. When the economy is sliding down and credit is harder to get, the guy with the cash is king. In addition, find out how to buy wholesale instead of retail to further lower your cost.
3 – Make the Money BEFORE Spending It
If there is some large purchase you need to make or want to make in the future, start putting small amounts in a savings account towards that purchase and keep that up until you have the cash to pay for it. If you have 10 years before your child enters college, then find out what the tuition will be and figure out how much you have to put away every week to have the cash the year they graduate from high school. Plus apply for every student scholarship, grant or financial aid package you can locate.
4 – Stash Some Cash for Emergencies and Living Expenses
Nothing will make you sleep better at night than financial freedom of having some cash tucked away for emergencies like having to get the car repaired, needing some unexpected dental work or losing a job. When you have a cash cushion you can get your hands on immediately, then magically, you stop worrying about money, your attention goes back on living life and enjoying it, and making money suddenly gets easier.
The only thing you have to fear in an economic crisis is not having some cash reserves in a savings plan you can immediately get your hands on. Did you know that more millionaires were made during the Great Depression in the United States than during any other era in our history? How did that happen? In that time, the economy crashed, the stock market crashed, inflation took prices of everything through the roof, the unemployment rate went sky high as businesses closed, and people who lost their jobs also lost their homes.
The people who had cash stashed away were able to buy houses, property and whole companies for pennies on the dollar. They ended up being millionaires because they had enough cash to weather the storm called the Depression.
Out of every bit of income that comes in the door, immediately carve off 10% and put it in a savings account that you have designated for your cash cushion. Even if you have to work an extra job and cut expenses on top of that, JUST DO IT! As the weeks roll by you’ll find you sleep better at night and walk through life with a lot more confidence knowing you have achieved financial freedom and protected yourself from the economic crisis looming on the horizon.
Sandra Simmons, President of Money Management Solutions has years of experience helping business owners and individuals manage their money to reach their financial goals.
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How to Protect Yourself in an Economic Crisis
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