Ready for Recession? What Families Can Do

Most of this blog is directed to business leaders, but with all this talk about preparing for recession, it’s time for some family financial planning.

(Note first that I am NOT forecasting a recession at this point, but I see the possibility of a recession increasing due to recent financial turmoil.)

First step is to evaluate your economic risk.  For those of you with jobs, look at the history of layoffs in your sector.  If you’re a construction worker or a factory worker making industrial equipment, you probably know that your sectors usually run through boom-bust cycles.  Your risk is high.  If your job is in health care or retail trade, your risk is much, much lower.  It’s always possible that your employer will go out of business or cut back on staff, but you should be able to pick up another job fairly easily.

If you own a small business, then think like a business leader and look at some of the past blog posts on the subject, such as this one

If you are living on a fixed income, be happy.  Fixed incomes are . . . fixed.  No worries about a recession.  In fact, a recession is a buying opportunity.

If you are living on investment income, try to divorce your thinking from day-to-day fluctuations.  Think long and hard about asset allocation.

The second step is to monitor conditions relative to your economic risk.  So if you are a construction worker, for example, follow the news about construction activity in your type of project (residential, commercial, roads, etc.)  Don’t be caught by surprise.

The third step is to sketch out a contingency plan.  Let’s take the job loss scenario.  What are the bills that must be paid each month?  How much cash do you have in savings?  Divide savings by monthly must-pay and you have the number of months you can get by.  If this is a small number–less than six–then sketch out what expenses can be cut if need be.  Make sure that you have credit in place for emergencies, such as replacing a car’s transmission.  You may not be able to raise your credit limits if you have been laid off, so ask about a higher credit limit now.  Also think about temporary job opportunities.  If you have little savings, what might you do to bring in some money while you look for work?  If you’re a computer programmer, there’s nothing wrong with delivering pizzas in the evening while job hunting in the day.

The biggest advantage of the contingency planning is that it forces you to think through your budget.  Even if you don’t follow your contingency plan in all of its details, having thought about it will help you be prepared.

Finally, maintain your financial flexibility.  That means limiting your commitments.  You have more flexibility if you spend your cash on a used car rather than committing to monthly payments on a new car.  If your cell phone contract is up and your phone is working fine, keep it.  Sure, you can get a new phone after two years, but only by locking yourself in to another two year contract.  Stay on the month-to-month plan with an old phone if you are at high risk.  Think about these long-term commitments with cable as well.

If a recession comes, I expect it to be pretty mild.  Also worth noting: unemployment rates are much lower for more educated people.  (The Bureau of Labor Statistics has a simple table on the subject.)  Good luck.