Sunday, April 19, 2009

Essentials for Surviving a Downturn

Surviving a financial downturn, such as a layoff or major illness, isn't quite the same as in times past. The basic principle is to hold onto what is essential. But the list of essential items is different now than in earlier recessions. Here are some things to keep in mind.

Computer. Vast amounts of information needed for daily life (like new employment opportunities) are placed on the Internet. And who doesn't use e-mail? A computer is essential. The waiting times for the computers at public libraries can be hours. It's best to have your own computer. A laptop is preferred, since it can be easily carried (in case you have to change living arrangements) and Internet access is as close as the nearest WiFi source. If you have a Windows based machine, don't skimp on the anti-virus software.

Cell Phone. You understand why you need a telephone. A cell phone is better than a land line because it can be used anywhere you get reception, and doesn't need to be re-connected in case your living arrangements change. If your monthly plan is too expensive, switch to a pay as needed account and don't talk so much on the phone.

Credit Card. It's almost impossible to get by on cash alone. Debit cards tend not to have as much consumer protection as credit cards. So you pretty much need a credit card. Minimize the number of credit cards you hold (fewer cards will tend to have a positive impact on your credit rating). Try not to carry a balance over from month to month. If you're carrying a balance, try to pay it down because, recently, banks have gone wild trying to raise rates on credit cards.

Car. Unless you live in New York City, you pretty much need a car. Maybe a few people with narrowly focused lifestyles in Boston, San Francisco and Washington, D.C. can get away without a car. Many of those find themselves signing up for car sharing services after shelling out too much money to hostile cabbies. The other 97% of Americans find it really difficult to get by without a personal vehicle. Downsize your wheels if you find the lease on the Escalade too expensive. Besides, real millionaires are more likely to drive a Camry, Accord, Taurus, or Impala, so chose a more modest vehicle and project the image of quiet prosperity.

Cash. When economic times are tough, cash is the emperor. Put as much as you can in an FDIC insured bank or credit union account. Or, if you have an amount that exceeds FDIC limits, put it in a money market mutual fund that invests only in U.S. Treasury securities.

Health Insurance. Sooner or later, you or someone in your family, will have a health problem. Most people can't pay cash for health care. Health insurance is outrageously expensive, and we should all hope the government can find a sound solution to the health insurance problem. Until then (and then could be a long time), make sure you've got health coverage. Drop other types of insurance (except mandatory auto coverage) before dropping your health coverage. Uninsured health care costs are perhaps the biggest reason why people end up in bankruptcy, so this is not an expense where being pennywise pays off.

Flexibility. Flexibility about what job you'll take, and what region you'll move to in order to get a new job, can make a substantial difference in your future. Bear in mind the cost of living. Quality housing in nice suburbs with good schools is available for a small fraction of the Northeastern U.S. or coastal California cost in cities between the Alleghenies and the Sierra Nevadas. A couple in Dallas making $150,000 a year and living a middle class lifestyle can retire as millionaires, while a couple in the suburbs of New York making $200,000 a year and having a similar lifestyle might just manage to get by. If you have an open mind, you'll open up possibilities for yourself.

Housing? The advice of older generations to do whatever it takes to hold onto the house makes less sense today, when homes are falling in value. There's not much rationality to sinking good money in a depreciating asset when you have other options. With real estate overbuilt, there are more residential options available. Some people in the bubbliest of markets--which today are the most deflated markets--are walking away from the expensive homes they bought two to four years ago and buying a cheaper home (sometimes at half the price) a few miles away. This strategy, although not nice, makes sense if you put little or no money down on the first house and aren't legally on the hook to reimburse the lender for its losses. Your credit rating might take a hit, so you'd have to figure out how to finance the cheaper house (one cynical maneuver is to buy it and then walk away from the more expensive house). As a matter of morals and ethics, we can't endorse this sort of behavior. But when Wall Street has screwed up phenomenally, and then used its political muscle to get extraordinarily generous bailouts from middle class taxpayers, it's not surprising that we are creating a generation of cynics whose me first attitude is simply taken from the wealthy who have exploited them.

No comments: