5 Strategies to Survive An Economic Slowdown
By Pinyo • Mar 25th, 2008 • Category: Financial PlanningWith the recent turn of events, I have been giving a lot of thought about what to do in event of economic slowdown — i.e., recession, stagflation, depression, financial doom, or whatever you want to call it. As I put this list of 5 strategies together, I realize that they are nothing more than responsible and sensible financial management strategies — something that should be practiced daily, and not only during economic turmoil.
Photo by archidave via Flickr
1. Practice Frugal Living
I believe frugal living is the basic foundation to sound financial success. A good place to start is with my 50+ Frugal Tips, Ideas, and Resources article. In general, the whole concept can be distilled down to these 5 tenets:
- Spend less than you earn
- Buy only what you can afford — This means reducing your reliance on credit card, and paying off your balance in full every month
- Cut your expenses – I listed a couple of money saving ideas in my articles: Little things you can do to save money and our planet and Top 10 Money Wasters, Are You Guilty?. A good place to start is with your budget. If you don’t budget, a money management tool like Mint.com can make the process easier.
- Reduce your debt — Except for your mortgage, you should actively try to eliminate your debt. A good place to start is learning about Dave Ramsey’s debt elimination technique, and this illustration of debt snowball, debt elimination process.
- Make every dollar counts – Stretch your money and make every dollar count. In my article 22 Money Maximizing Moves You Can Do Today I shared some techniques that you can use right away.
2. Bear-proof Your Investment Portfolio
Over the years, I have come to believe that best long-term investment strategy is to leverage a globally diversified investment portfolio consists of low cost passively managed funds that reflect your risk tolerance level and investment time horizon. This is a strategy that Larry Swedroe advocates, and you can read it in his book: The Only Guide to a Winning Investment Strategy You’ll Ever Need.
There are two main parts in this strategy:
- Keep the costs low — For instance, limit the number of trades, choose low cost brokerage with minimal fees and low trade commission fees, choose low expense ratio mutual funds, limit tax liabilities, etc.
- Diversify – Spread your investment across different stocks, asset classes, sectors, countries, and beyond equities.
3. Establish An Emergency Plan
If you lose your ability to generate income, do you have enough cash reserve to stay afloat? More importantly do you have an emergency plan to keep you out of trouble? Here are some good articles to get you started:
- Does Your Family Have An Emergency Plan?
- How To Protect Your Greatest Asset, 6 Ideas
- Dave Ramsey Baby Step 1 $1000 Emergency Fund at Gather Little By Little
- Dave Ramsey Baby Step 3 Fully Funded Emergency Fund at Being Frugal
4. Protect Your Job
For most people, their job is their biggest source of income. During recession, the chance of unemployment increases dramatically, and we have seen many examples this past few months. Fortunately, there are a few things that you could do to project your job.
- Networking — If you haven’t done it already, this is a great time to start.
- Get to know your peers and the higher ups better.
- Take on special projects that expose you to other people outside of your immediate workgroup.
- Join caucus groups, industry groups, and associations.
- Help your company increase profit and revenue
- Help your company reduce expenses
- Make sure your good work is noticed
- Expand your skillset – Getting a new certification or skill can make one much more marketable.
If you ended up losing your job anyway, here’s a good article What to Do If You’re Laid Off?
5. Diversify And Grow Your Alternative Income Streams
Now that you all your bases covered, it’s time to think about different ways to increase your income. If you are reluctant about building alternative income streams, I’d like you to consider this statement carefully:
Your job is not going to be there forever. You can’t work forever. And you can’t retire until you figure out a way to replace income from your job.
Don’t wait. The best time to start building your alternative income streams is now.
What others are saying about surviving economic slowdown:
- A Surprisingly Large Number of Things can be Lived Through at Mrs. Micah
- Survive A Recession, Think Long Term at The Digerati Life
- 5 Ways I Plan To Survive The Recession at The Wisdom Journal
- Why NOW is the Best Time to Get Out of Debt at Credit Withdrawal
- 12 Ways to Make Yourself Recession-Proof at Prime Time Money
- How To Protect Yourself Against a Recession at Mom Grind
This post was featured in:
- The Festival of Frugality #119 hosted by Consumerism Commentary. For more information please visit the Festival of Frugality.
Great article - thanks.
“Spend less than you earn” - saving? It’s been a while since Americans have done that.
According to MSN’s Money Central, Americans’ personal savings fell to -0.5% last year, the first time since the Depression that the savings rate has been negative for a year.
part of that may be that Americans have been feeling wealthy since their homes were appreciating so much. Maybe now, with less confidence, savings rates will start improving.
Diversifying income streams is a huge advantage during an economic downturn. Decoupling one’s income with a single market is a surefire way to survive a recession. I suppose this is one reason having a job is a poor long-term approach to building wealth as you are tightly-coupled with your employer’s market performance for a salary.
Great tips, Pinyo. I think the tips on diversification are great - diversification with income, investments, etc. Protecting your job is another extremely important thing to do, and your tips are excellent. One thing you could add is expand your skillset during this time. Getting a new certification or skill can make one much more marketable.
What a great time TO diversify! investments, for sure; but also job skills. I am trying (with limited success) to encourage our college aged kids to VOLUNTEER for what have, in the past, been salaried jobs. My reasoning is schools, public services, even businesses, still need folks–they just can’t pay for them right now. Great opportunity to get that all important experience, when they’ll be grateful for the help, willing to take the inexperienced, and one can position oneself for what will eventually turn around and become a paying position/job skill.
Instead of spending less than you earn, I like to think of it as earning more than you spend. It gives you that drive to seek out different opportunities. Regardless of the economy.
Are there any strategies to survive an economic speedup?
@MinWage,
A yacht, private island and some armed, but discreet guards was what I had planned for an economic speedup. Richard Branson beat me to the punch though.
@Pinyo, great post. Very timely and informative. Thanks for including a link to me too!
Thanks for the link to my article, Pinyo!
I’m working on all of the above! Great post! I have to admit that I’m trying to beef up my EF as quickly as possible!
Randall -
That’s hilarious! But while the question appears ridiculous, it is a sincere question.
Economic speedup –> job growth –> more people employed –> unemployed twentysomethings living with parents move out and get their own housing –> rental vacancy rates decline –> rents go up while the already-employed unskilled worker didn’t get a raise.
Agree! But, I would add one other: build up your “war chest” so that you can pick up some investment bargains (be they stocks and/or real-estate) as and when you are ready … I missed some of the last couple of years of the Bull Run because I progressively cashed up to take advantage of the Bear market that was sure to come … and did. Just remember: after every bottom there is another top …
This is the right way to run your finances regardless of the economic climate. Of course, people are a lot more interested when they have a little fear in them. Great suggestions!
@Vered - Thanks! Yeah, I was looking at that statistic a while back. Negative savings is scary.
@Squawkfox - Not just for economic downturn, I think it’s good at any time.
@Patrick - Good add. I am going to add that to my article.
@Jay - Good luck with your kids. I wasn’t very interested in volunteering when I was in college. Now I wish I had tried harder.
@Anthony - That’s definitely better.
@Randall and Ron - No problem.
@SavingDiva - Thanks. Always good to have an emergency fund; especially since some online savings still give “relatively” decent rate.
@AJC - But aren’t you missing opportunity trying to time the Bear market?
This is a great advice for any kind of economic situation.
These are excellent cornerstones to work by. I especially agree with frugal living and diversification. The more flexibile and adaptable you are as an employee, then the more valuable. So get on as many training programmes as your budget can afford or that you employer will pay for.