Tuesday, March 3, 2009

How to prepare (financially) for a depression

Yes, yesterday was an ominous post. No one wants to think about-- let alone believe-- that a depression is upon us. I hope I'm wrong.

In case I'm not (and because it's a good plan anyway) I am going to detail some ways we can prepare for a potential depression. And no, I'm not going to tell you to learn how to cook a squirrel. That is a survival skill you can look up if it's necessary.

  1. Start an emergency fund. This should be 3-8 months of expenses depending on your job. If you work in a less-than-necessary field, be thinking 8 months. If you are a nurse, ER doctor, certain kinds of teachers, etc. and you don't know of any impending layoffs or downsizing, you can think 3-6 months. After you complete the rest of this list, build it up more. You will want cash on hand.
  2. Get out of debt. Get rid of your credit cards, car loans, car leases (please tell me you don't have a lease!), student loans... everything! You want what little money you have to be able to go where ever *you* want it to. You can do this with only a 'mini' emergency fund if your debt is small enough to be wiped out fairly quickly. Just don't forget to go back and finish it.
  3. Pay off your house. (a.k.a. get out of debt). I don't know why so many people do not consider their house payment to be debt. It is! The bank owns your house! I know there is a huge school of people out there who don't believe in paying off your mortgage early, but if you knew that no one in your family would have a job for the next 18 months, would you wish you had your house paid for? I thought so.
  4. Cut costs. Start couponing, reducing (or eliminating) cable, review your insurances to be sure you aren't paying too much, drive less to save on gas, don't eat out or eat out less. Take that money and insert it into paying off debt or saving in cash.
  5. Take care of what you have. This especially goes for your car and house. Do not skip the oil change or the leaky roof. If all you have is the shirt on your back, your car, and your house, aren't you glad the car runs and your house actually keeps you dry?
  6. Buy for the long haul. When shopping for clothes, don't buy something that is going out of style tomorrow-- or even next year. When buying appliances, skip the 'automatic pickle slicer attachment' or whatever other unnecessary doodad, but don't waste your money on something that will not last, either.
  7. "Stockpile." I do not mean go crazy and have toilet paper stacked to the ceiling in every room of the house. I mean give some thought to overstocking your pantry and toiletries. Pay attention to what is on sale and what you could pick up for free or next to free. Walgreens will pay me to buy toothpaste this week. Even though I am not out of toothpaste (actually just bought toothpaste), I will likely go pick some up. If you go out and spend $200 on toothbrushes and industrial-sized bags of rice you are missing the point.

Things NOT to do:

  1. Cash out all of your retirement. Unless that is all of the money you have in the world and absolutely cannot find a job, leave that where it is for now.
  2. Buy so much beans that you have a rat infestation. If stockpiling is 'your thing' and you really want to go for it, do. But if you are going to invest that much time and effort, do your research. Be sure you would want to do that even if you did not think the economy was bad. Also be sure you know how to properly store things and how long the shelf-life is. It would be awful to avoid starving only to poison your whole family with tainted peaches.
  3. Panic. This list is to help you avoid panicking. Use your head, be smart, prepare as best you can. We're all in this together, so don't get some idea that you're going to starve alone in your living room floor. People will find a way-- it's just that the people who prepare earlier will have a much easier time of it.

Really, preparing is pretty simple. If we all prepare now, maybe it won't be so bad.

Feel free to add to this list by posting a comment.

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