Sunday, May 31, 2009

6 worst things to do in a recession

Are we mired in a long-term recession or will the "green shoots" of economic growth we're seeing be the real thing?

Without a crystal ball we can't predict an official end date to the downturn but one can lookout for the six worst things one can succumb to:

Ignoring the situation. If you're not paying attention to your personal financial situation it's time to start. Has your credit limit been slashed or your APR spiked? Has your credit score dipped? How long could you live off your savings if you lost your job? The ostrich method to money management never works well. That's particularly true if lenders are contacting you about delinquent accounts (i.e. your mortgage).

Take a deep breath and open those bank and investment account statements, review your budget, pay your bills on time and keep in touch with creditors.

Pulling money out of investments. If money's tight it can be tempting to dip into investments to maintain your lifestyle. Doing so, however, will cost you - in several ways. You may have to pay early withdrawal penalties and fees; you'll have to pay taxes on the funds you receive and, you may miss the market recovery and fail to recapture your losses.

If you're considering cashing out because of fear that you'll lose more by keeping it in the market, let cooler heads prevail. Instead remind yourself how much time you have before you need the funds, check to make sure you're diversified and consider wise defensive investment moves instead of stashing it all under your savings account.

Borrowing more money. Do you carry a credit card balance? That's a clear sign that you're spending more money than you earn each month. Until legislation is passed, credit card companies can continue hiking interest rates, tacking on fees and penalties and put you further behind. Get financially healthy and lay off the credit spending before it spirals out of control.

Slacking off at work. It's time to get serious about staying employed. Nearly six million jobs have disappeared in 17 months (since the recession's start in December 2007) and the national unemployment rate is at its highest since 1983. Companies are facing serious cash crunches and making drastic changes to trim costs.

For example, FedEx, which touted a "no-layoff" policy for years, recently let more than 1,000 employees go to save the company $1 billion. The days of assuming your job is secure are over. Get there early, work hard and add value any way you can - your livelihood increasingly depends on it.

Co-signing a loan. With banks tightening lending guidelines, fewer people are able to qualify for a loan on their own. If a friend, partner or family member really needs the funds, they may approach you to help. Remember that co-signing makes you legally responsible for repaying if the other borrower can't (or won't). Can you afford that? If not, risk the relationship and walk away for your own financial safety.

Jumping in to the real estate market. With attractively low home prices and interest rates, the real estate market is enticing for novice real estate investors. Before racing in, accurately assess your risk tolerance - what would happen if you lost your job? Could you float the loan? Do you know how to manage real property assets? What type of return do you need to make? Learn from the housing bust that created the current recession and move cautiously.

1 comment:

Smita said...

hey this is a real useful post...

I was a big spender but luckily have managed to curb my buying instincts.....