In this article, I propose Six Steps…to Financially Surviving a Recession. Some believe that saving for three months is impossible. I think it is not only possible but easier than most people think. I’ve outlined six steps to financially surviving a recession. For some, this will be easy to do. For others, you may need to seriously change your spending habits.
Before I begin, however, you should speak with your financial advisor before taking this or any other financially related advice. Finally, this is a long article but I promise it is well worth the read.
#1: Calculate your total monthly necessary expenses; then calculate your total monthly discretionary expenses.
Your total necessary expenses are those that MUST be paid even if you lose your job. To clarify, your mortgage or rent is a necessary expense. Your gas and electric is a necessary expense. Groceries are a necessary expense. Your minimum credit card payments are a necessary expense. A discretionary expense is any expense you can completely eliminate without a substantial penalty. Cable TV, the pool membership, and meals out are all discretionary expenses.
What about services with cancelation fees? If the fee to cancel is less than the cost to complete the contract, then it is a discretionary expense; meaning you can get rid of it if needed.
After you calculate both the necessary and discretionary expenses, add them together to get your total monthly expenses.
#2: Trim the Fat
You’ll need to cut back and be ruthless about achieving your goal of saving three to six months of expenses! Look at all of your expenses listed from Step #1. What can you cut or trim? If you can cut an expense entirely, all the better. However, most of you will likely trim what’s already there. Here are ways to cut back.
Gas and Electric:
- Turn up the thermostat in the summer a few degrees and turn down the thermostat a few degrees in the winter. Save on heating and air conditioning.
- Turn off lights and appliances when not in use.
- Turn down the heat on the hot water heater (just a little – I’m not advocating cold showers)
Making these small changes can add up to a few bucks a month.
Entertainment:
- Cut back on the number of times you eat out.
- Cut back on entertainment in general.
I’m not saying you can’t have fun…but can you have fun without spending a lot of money? Of course! Instead of going to a movie and dropping $20 for the tickets and another $10 on popcorn, rent a movie and pop some microwave popcorn.
Here’s the savings:
- Going out to the movies: $30 ($10/ticket x 2 people + $10 in refreshments/popcorn)
- Renting a movie: $10 ($5 for the movie + $5 for microwave popcorn).
Total Savings: $20…multiply that times a few weeks and you’re saving some serious money.
Cable:
Do you need cable? Most will say yes. But, do you need all those premium channels? Can you live without them for a few months?
Insurance:
Check with your auto and home insurance agent to see if it is possible to raise your deductible. Many times a higher deductible will reduce your monthly, quarterly, or yearly payments.
Credit Cards:
This is a long shot, but if you have always paid your bills on time and are in “good standing” with your credit card companies, ask them to reduce your interest rate.
Groceries:
Try to make dinners and lunches that are more economical. Casseroles, stews, and Crockpot dishes are great examples of meals that are inexpensive and easy to cook. The cost per serving is very low when compared to other meals.
Coffee:
How many times per week do you go to Starbucks or some other coffee café? You don’t need to cut that out entirely, but scale back. If you go every day, go every other day. If you go twice a week, go once a week. Try brewing your coffee at home. That saves money as well.
Look over your expense sheet and see what you can cut and trim.
#3: Calculate your Current Monthly Cash Flow
Where does your cash go on a monthly basis? At the end of the month, how much surplus cash is left over after you subtract your expenses from your income? Is there cash left over or is it all spent? After you complete Step #1, you should have a good idea of your monthly expenses. Subtract that from your monthly income to determine what’s left. That will give you a general estimate of your cashflow. However, I prefer a more precise measure.
I use a software program called Budget Calendar by MiShell. It is an inexpensive budget program ($14.95 with a 30 day free trial) that is light-years ahead of anything I’ve ever tried. This software budgets money based on exactly when you get paid and when bills must be paid. I know exactly how much money I will have on any given day. Here is a screen shot. You won’t be disappointed.
After this analysis, you’ll know if there is a surplus or deficit at the end of each month.
One last note, remember to include your monthly debt payments. When you do, however, only include the minimum payment due each month.
#4: Calculate your Monthly Cash Flow after trimming the fat
Use the same process as defined in Step #3 but now calculate your cash flow based on your new, trimmed, leaner budget. I hope that you now have a surplus of available cash to save. If you don’t, you need to seriously look at your expenses and make some significant changes. You are likely living a $100,000 lifestyle on a $50,000 salary.
#5: Start saving
This is it. Start saving! “But what about my mound of credit card debt? Shouldn’t I pay that off before saving?”. No, let me explain why.
Let’s assume that you have a lot of debt and no savings. And to clarify, by debt I mean all debt not counting your mortgage such as credit cards. Assuming that your interest rates on these debts are within a normal range of 0% to 15%, I advise that you pay the minimum amount due on each. Save the surplus cash instead of paying down your credit cards. Here’s why.
Remember that when you calculated your cash flow, I said that you should only include your minimum payments as part of your monthly expenses. Your three to six months of savings includes these minimum payments. Also remember that your three to six months of savings is to keep you afloat while you find a new job. This means you need to save what is a necessary minimum. A minimum payment of $150 on a credit card is the necessary minimum to get you by. If you take your monthly surplus and pay down a credit card, that’s wonderful. But if you lose your job, you’re in trouble. It is better to have six months of savings with debt than it is to have less debt but the inability to pay your mortgage.
Once you save three to six months of expenses, then proceed to pay down your debt. Then you know with complete confidence and with great relief that if you lose your job in a recession, you are capable of paying all of your minimally necessary expenses.
#6: Stay focused, stay determined, and update your budget
You have a plan…now follow it! Keep your budget with you at all times. Before you spend money on something, look at the budget. By constantly referencing your budget, you will be reminded of your goal.
Make sure the budget is a living document. Keep it updated. If you spend less on groceries one week, note it in the budget and see how much additional savings you have. If you need to fix the breaks on your car, note it in the budget as an unexpected expense and adjust your savings accordingly.
If you follow these six steps, you can save three to six months of expenses. For some ths will be easy. For others, you may need to make some lifestyle decisions. The choice is yours. But for piece of mind sake, it is better to cut back now than not have enough money should the unfortunate happen.
I know this was a long article but I hope you find it valuable.
Above all, stay positive. Remember, you’re preparing just in case.
From: The Cube Monkey: Business Success and Personal Development
Ron is a director of an MBA program and is currently earning his Ph.D. in Organizational Leadership. He was a management and information technology consultant for ten years. His insight and advice comes from personal experience (success and failures), doctoral research, and the hundreds of business and personal development books and articles he's read.
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