Tuesday, 16 August 2011
How recession-proof are you?
Some of us are of course really struggling in this recession. When that happens, it is all about survival paying the mortgage or rent and buying food. If there is no money for anything else you do not get anything else.
The trouble is, many people have actually been in that position for years without realising it. In other words, they had less than nothing to start with because they have borrowed more than they earned and were not paying off the debt as a priority, but spending their income on other non-essential things. Then when someone in the household loses a job it is a disaster, even if there is someone still working. So this is about how to assess your situation and recession-proof insofar as that is possible, because this affects everyone.
We have been reviewing our position given the changes and these are the questions we are asking ourselves.
1. How inflation proof are we?
2. Are we living on income or capital?
3. Are we putting some money into savings each month – even if it is a very small amount?
4. How would we manage if one or both of us lost our work?
5. How will the proposed changes in our occupational and state pensions affect us in the future? This is relevant no matter how young you are.
1. How inflation proof are you?
We are fortunate to have a relatively inflation proof lifestyle. Not having a large income, we also do not spend much money. That means spending time doing things instead of paying others to do them, which is more inflation proof.
As the price of goods and services goes up and the risk of unemployment gets higher, the value of doing things yourself also goes up.
So for example economising to reduce expenditure rather than just earning more money makes sense. The job can disappear in a moment and when no money is coming in, the time spent growing food is worthwhile even if the hourly rate is low. The lower the expenses the better you survive unemployment and wage cuts.
There are other hidden benefits to things like growing vegetables such as meeting the neighbours whilst out in the garden and being able to cancel the gym membership.
2. Are you living off income or capital?
Spending everything you earn in wages actually means you are living off capital! There is nothing there for unexpected expenses so when those occur you need to borrow money.
This is not a time to deplete savings but to increase them whenever possible. The interest earned on savings has gone down in many cases (unless you have inflation linked savings) which means you need to save harder to gain the same ground.
Here are some useful questions:
Are you saving 20% - or at the very least 10% of everything you earn? If not you are actually living beyond your means and have no financial cushion if circumstances change or for roof repairs, a new car or other larger expenses.
· Do you have debt? If you are working in a well paid job but have debt get rid of it as fast as possible. Put every spare penny/cent into paying it off. If the debt agreement does not allow you to pay if off early, put the money into a separate savings account to pay for it later. Get rid of the most expensive debt first. Transfer any credit card debt to a 0% deal. Do NOT use that card for purchases and aim to pay it off before the 0% deal is finished.
Remember – debt can be a disaster if you become unemployed.
· Insure what you cannot afford to lose – but no more.
In other words, insure your house and your car. Your health if you live in a country without a National Health Service. If you have dependents and no income other than your job, look into insuring against you becoming ill or dying so that they will survive without you.
· If you lose your job, make sure you will not lose your home. If there are two people in jobs within a household, mortgage protection insurance may only pay up if both people lose their jobs. Or it may pay for half the cost of the mortgage but not all of it. Check that the cover has the right balance, so that if the main wage earner is made redundant there will be enough to pay the mortgage and remember there is usually no payment for the first three months. In other words, the very least there should ever be in the bank is enough to cover three months, mortgage, council/property tax and bills. Remember you are unlikely to get any state benefits if the other person is still working, mortgage or not, and it is very difficult to borrow money if you do not have a job.
· Put your savings into tax free cash savings. This is not the time for individuals to play the stock market. Remember financial advisers do not make commission out of cash savings such as National Savings and Investments so are unlikely to recommend them or be abreast of them in the same way they are with other investments.
Use up all the tax free cash savings options available. In the UK National Savings and Investments Index Linked Savings Certificates are tax free and earn the equivalent to the Retail Price Index in interest, plus a small amount. That means they are inflation proof. Check the inflation rate and if it is high (as it is at the time of writing) they are very worthwhile. You are not paying any commission off what they earn either.
· Check that your personal pension is in the safest investments possible whilst the stock market is volatile. You will have to ask the question, it will not happen automatically. Keep an eye on how the pension is doing and it will do much better.
· Remember - no one will look after your money as well as you will. Keep on top of it, move it when interest rates go down and keep putting a little bit into savings each month.
· Consider all the ways you can reduce out goings and inflation proof your lifestyle for the future. We installed solar panels which have inflation linked payments for the electricity generated, grow some of our own food, have a wood burning stove and have paid off the mortgage early. Your house is a liability rather than an investment in most cases, because you cannot sell it and live off the money without becoming homeless. Make the house as low a liability as possible by moving to a smaller house if you have a large mortgage, doing Bed and Breakfast, getting a lodger or anything else you can think of.
In other words this is a time to be resourceful, reduce unnecessary spending and put more money into savings. Develop good habits now and if things do go wrong, it will be much easier to cope.