You have all read the headlines or heard the nightly reports about economic slow down and layoffs. Whether you own a part-time, commercial farm or small business, or are a wage earner, salaried employee or retiree, you pull a few notches up on your financial and economic belt every time you hear the economic bad news.
The following are a few tips to assist you in preparing for economic belt tightening times.
Rainy day fund.
In the Feb. 23 “Money” section of USA Today, people were asked if they lost their job or experienced insufficient business earnings, how long they could stay on the Survival Island of finances without suffering significant financial hardship. Nearly one-half indicated less than one month.
Approximately one-third said four months and nearly one-quarter said one year or more. What would be your response?
Do you have a rainy day fund? Maintaining such a fund is analogous to having a few extra loads of wood in the woodpile or extra flour in the pantry to weather the nasty winter storms.
In good times, taking things for granted is easy, but an unexpected storm or economic event can catch you off guard.
If you are a self-employed business, have a mortgage or children, then ideally, you should have six months or more of family living cost or net income.
As farmers and small business owners, you are most vulnerable when you maintain low cash reserves for emergencies or downturns in economic cycles. In many cases, you must resort to selling productive assets to cover basic financial needs.
If you do sell assets or stocks and mutual funds, you should talk to your accountant or financial planner about ways to minimize taxes.
If you are a wage earner or salaried, three to six months of net income or salary in reserve is a good goal to which to aspire. The single person, no children, few financial obligations may find that three months or less is enough.
A recent university graduate, you should save enough cash for a major dental or medical cost if you lack insurance or a transmission or motor repair if you own an auto or truck.
Where do you invest?
Your goal should not be to maximize earnings on liquidity investments. Your rainy day fund should be a low risk account that pays the highest interest available for that type account.
Certificates of deposit with short-term maturity date versus treasury bills or government bonds are low risk, but exhibit modest returns. Some money market funds, though not federally guaranteed, are quite safe and offer a solid return with little or not penalty.
What should you do?
As the economic times tighten the first step is to develop a family budget on a daily, weekly, and monthly basis. You need to monitor both large and small expenses, particularly cash withdrawals and miscellaneous expenses.
Any money that you save are tax-free dollars and can be placed in your rainy day emergency fund.
Second, you could reduce or temporarily defer contributions to the retirement savings plan. However, you should discuss this strategy with your accountant to determine the net effect to income. But, by all means, you should return to your long-term savings strategy after the financial storm is over.
Next, keep your job skills, resume, business networks, and contacts up to date. Layoffs become a much bigger problem if you take a reactive rather than a proactive approach.
Finally, you should communicate with your lenders if you have problems. You should negotiate possible solutions, such as minimum payment on credit cards or principal deferment on the mortgage or other obligations.
Economic downturns, just like storms, eventually pass. Being well prepared in good economic times allows you stay on financial and economic Survival Island in times of adversity.