5 Ways To Survive A Recession

By Joseph Hearn - September 10, 2008 - AARP Bulletin Today

The U.S. economy is in a bit of a pickle. In no particular order, we’ve had a housing bubble, a credit bubble, a bear market in stocks, soaring energy costs, falling consumer spending, increasing unemployment, high food costs and burdensome debt levels.

The government has taken steps to maintain calm and stabilize the system—lowering interest rates, mailing $100 billion in stimulus checks, bailing out Bear Stearns, guaranteeing the debt of Fannie Mae and Freddie Mac, passing a $300 billion homeowner rescue package—but the problems have spread so rapidly that they threaten to pull the United States and possibly the rest of the world into recession.

To be sure, the economy is not yet officially in recession. It’s up to the National Bureau of Economic Research to make that call, and so far it hasn’t. Sometimes, however, we don’t need a doctor to tell us our arm is broken, especially if bone is poking through the skin. Consider the diagnosis of investor Warren Buffett: “By any common-sense definition, we are in a recession.”

So, we’re either in a recession or well on our way to one. Whatever the case, financial experts say there are ways you can protect yourself:

1. Don’t panic. Recessions have historically occurred every few years and they last, on average, about 10 months. No matter how bad it gets, the vast majority of people will still get up and go to work, pay their mortgage, and take a vacation now and then. The steepest recession in the last 30 years occurred in 1981. It lasted 16 months, the economy shrank 2.6 percent and unemployment reached 10.7 percent. More recent recessions have been less severe. The 2001 recession lasted only eight months, the economy shrank less than 1 percent and unemployment was barely over 6 percent.

“The last recession was over before it was officially announced,” says Ernie Goss, professor of economics at Creighton University in Omaha, Neb. “This one will likely be somewhat longer because of the sharp downturn in housing, but the economy will eventually recover.”

2. Repair your balance sheet. Many who took on heavy debt to purchase inflated assets like real estate are now in a position where they owe more than they own. According to a recent report by real estate website Zillow, nearly one-third of all homeowners who bought since 2003 now owe more on their mortgage than their homes are worth. For some, selling or refinancing may be an option.

Get rid of debt where possible and build up your cash reserves so you can ride out the storm. And put away the plastic. Credit cards in a downturn are like saltwater to a thirsty person lost at sea: It looks tempting, but it won’t help. Cut up all your cards except one for emergency use and then make a list of creditors to whom you owe money. Starting with the high-interest-rate credit cards first, pay off your purchases from years past before making any new ones.

3. Stop the bleeding. We all have leaks in our budget that can add up to serious money. Spending $10 a day at the vending machine or the mall is $3,650 per year. That same $3,650 would be a good start on a cash reserve or could be used to pay off high-interest credit cards. Miscellaneous expenses are the easiest to cut, but don’t be afraid to trim the fat in the rest of your budget as well.

4. Meet with your advisers. During the last bear market, many people learned the hard way that their investment portfolios were not properly allocated. Now is the time to ensure that your investments make sense based on your goals, time frame and risk tolerance. If you’re currently working with an adviser, these meetings are likely included in the fees or commissions you’re already paying. If you’ve handled your finances on your own and are just interested in receiving a second opinion, most firms are willing to provide consultations on a fee-only basis, usually ranging from $100 to $300 per hour.

5. Keep investing. When money is tight, it’s tempting to stop making IRA and 401(k) contributions. Because of the power of compounding, however, taking even a one-year break could put a serious dent in your nest egg—even more so if cutting back on your contribution means giving up your employer match. To illustrate, if you have 10 years to go until retirement and are contributing $250 per month to your 401(k), skipping just one year of contributions would shrink your nest egg by $6,000, assuming an 8 percent annual return.

Also, if you’re nervous about throwing money into a sinking market, consider the tip offered by health services coordinator Dorothy Ray of Omaha: “Investing into a volatile market has been scary, so rather than watching my account balance I’ve been watching my share balance. More shares will eventually translate into more money.”

Legendary investor Shelby Davis says it well: “You make most of your money during a bear market. You just don’t realize it at the time.”

Joseph Hearn is a financial planner in Omaha, Neb., and the coauthor of If Something Happens to Me.