We find ourselves in one of those peculiar times when it’s anyone’s guess which way the economic winds are blowing.
The media is doing little to untangle the confusion. Last week Yahoo! Finance reported that the economy may be dangling on the edge of another downward plunge in 5 Doomsday Scenarios for the U.S. Economy.
This week AP reports that Fears of a second recession ease, at least for now. So which is it? Are we still in (or returning to) a bad economy, or are brighter days ahead?
Since we obviously can’t know for certain, we should work for the best but prepare for the worst. The best time to prepare for the next recession—whether it comes sooner or later—is before it happens.
Continue the frugal/minimalist lifestyle learned in the most recent downturn
In the last few years doing more with less became a survival skill, and now is not the time to abandon what we’ve learned. Living on less—even in better times—is a way of creating financial opportunity elsewhere, and that’s something we need to be doing at all times anyway.
If you’ve become more frugal recently, don’t abandon the effort because of re-employment or even a higher income. The less money we need to get by on each month the more cash freed up to put into savings or debt reduction. Both have the potential to improve our long term financial position.
Save money regularly
Having savings is a win-win: in good times it provides capital for investment opportunities; in bad times it’s one of the best cushions against uncertainty we can have.
Save money no matter what, and be ready for anything—a boom or a bust. Savings works well in either environment, and the more you have the greater the likelihood that you’ll thrive come what may.
Close out debt positions
Probably the biggest lesson learned from the Great Recession is that—yes—debt is a bad thing. In most cases where people have faced serious economic situations, debt figured substantially in the fall.
Work to reduce and ultimately eliminate any debts you have, even if the economy rockets to a golden era. No matter what the state of the economy, debt is not a friendly traveling companion. And in a bad economy there is no such thing as good debt.
Avoid taking on new debt
It should go without saying that we need to be self-financing where ever we can. That means pay cash or don’t buy! Even a little debt has a way of becoming bigger debt, because with each new loan we take, our resistance to new debt weakens. Few people get into debt overnight; for most it’s a process that starts slowly and builds with time.
Pay off what debts you have, and keep from taking on fresh ones. Buy a used car you can pay cash for, get furniture from estate sales, take vacations closer to home and take the credit cards out of your wallet when you go shopping.
Pay down your mortgage
Truth be told, it isn’t so much a drop in value that causes problems for homeowners nearly so much as the worth of the home relative to the amount of debt it secures. The people most negatively affected by the drop in house prices were those who carried maximum financing, not those with small mortgages compared to their homes value.
One of the best strategies for preparing for the next downturn will be to accelerate payment on your mortgage. Paying down a mortgage is a long term process and if you’re in a position to do it, you should start right away.
Keep the mortgage balance falling so you’ll have at least some cushion against any future house price declines, and you and your home should weather the next recession with little trouble.
Seek out and implement new income generating ideas
No matter which way the economy goes, it seems pretty certain that the job market of the future will be less secure and less predictable than it’s been in the past. It may be that globalization and technology are having an even greater impact on jobs than the recession has.
What that should mean for all of us it that we constantly improve our skills and develop new ones. We should seriously consider developing multiple income sources, including side jobs and side businesses. Not only will this increase our incomes, but it may also help us to identify and prepare for our next career. And in this job market, it’s not hard to see how important that can be.
“An ounce of prevention is worth a pound of cure”—how many times have we heard that? Now is an outstanding time to put that old saying into practice, it could help us to see our way clear when the next bump in the economic road hits.
What are some of the lessons you’ve learned from the Great Recession? What are some practices we should take on now that might spare us the worst of what the next economic crisis may bring?
(photo credit: kevincollins)
This post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.