Is Recession Inevitable? How to Prepare Your Personal Finances for the Possibility

Is Recession Inevitable? How to Prepare Your Personal Finances for the Possibility

Recent headlines on the American economy have been rather grim, with a variety of key indicators showing a slowing in overall economic activity. These developments have caused many financial experts to warn of the possibility of a serious economic downturn in the near future, some predicting deep recession in 2008. While the headlines are often focused on the effects of this possible recession on business interests and Wall Street, individual consumers also feel the pain of poor economic conditions. With growing indications of a possible recession on the horizon, the average consumer would be wise to take heed and prepare a financial defense against the potential of economic hardships to come.

Much of today’s financial news centers around the turmoil that has been created in the economy by the collapse of the housing bubble, the sub-prime foreclosure crisis, and the resulting credit crunch. These events have had far reaching effects in the US economy, as well as impacting the economies of many other nations. Many investors in mortgage backed securities, ranging from the large investment banks, hedge funds, and retirement funds down to the individual investor, have seen heavy losses as foreclosure rates surge, spreading turmoil throughout the financial world. Personal bankruptcies are on the rise, as are corporate ones, especially in the mortgage lending industry. When these factors are combined with other economic data, such as soaring oil prices, increased inflation, stock market volatility, and the declining value of the US dollar, the potential exists for significant economic challenges in the days ahead.

Today’s consumer has much to fear from the recent woes in our economy. Many experts are predicting that the typical American family will feel the squeeze of this recession, should it take hold, more than any other in recent history, as its roots will lie in the upheaval that has occurred in the housing and credit markets, which affect individuals more directly than most other economic sectors. Of course, homeowners who have found themselves amid the wave of foreclosures and bankruptcies have already felt the pain, and many of those whose adjustable rate mortgages are due to reset in 2008 and 2009 will soon follow. Even homeowners who are not in danger of foreclosure have been affected by this crisis, with home values falling at record rates, and the downward pressure on home prices is unlikely to ease in the near future as high foreclosure rates continue to impact the housing market.

The typical consumer these days carries a great deal of debt and holds very little in savings, a very vulnerable position should the experts predicting recession prove to be correct. Credit card debt is extremely high among Americans, with figures for 2007 showing that the average consumer owns nine credit cards, and the debt on those cards averages approximately $8,500 per household. The US Census Bureau mortgage statistics state that 70 percent of owner occupied houses are mortgaged. Of those homeowners, approximately 23 percent hold a second mortgage or home equity loan on their homes, and a very small percentage of them, 0.4 percent, have both a second mortgage and a home equity loan.

The savings rate among average Americans is at a record low, negative 1.2 percent at the end of 2006, down from negative 0.5 percent in 2005. To add a bit of perspective to those numbers, the last time the savings rate was recorded in negative numbers was during the Great Depression, and 1984 figures reflected a savings rate of 10.8 percent. Negative savings rates indicate a population that is living beyond their means, spending more money every year than they earn.

However, the average American can take steps to help insulate his or her finances from recession. The very first thing that needs to be accomplished is an immediate commitment to living within one’s means and refraining from taking on any further debt, if at all possible. Devising a spending plan will help to direct the household funds in the right direction. The next thing that should be a priority, and be figured into the budget plan, is working towards paying down existing debt.

When making a debt reduction plan, it is wise to prioritize debt. Obviously, debt that is associated with maintaining the roof over one’s head must come first. While many may feel that the next in line should be the automobile payment, that may be worth taking a second look at. It may just be more practical in some circumstances to relinquish a brand new, expensive, fuel guzzling vehicle and take on a more affordable, used vehicle in its place. Once living arrangements and work transportation have been resolved, then focusing on the debt that carries the highest rate of interest may be the smartest move towards restoring financial health and security.

While, in some cases, it can be tempting to take on a loan consolidation debt, that is something that should be thought over very carefully. Credit counseling may help to bring the financial situation under control without taking on more debt. The lure towards debt consolidation loans is often that the loan will have a lower interest rate than the loans that it is used to pay off. That may be true in some cases. However, it is also true that in many circumstances, it is possible to negotiate a lower rate of interest with creditors, and sometimes, those creditors will be willing to eliminate the interest in hope of securing the return of the principal.

Once progress is being made towards reducing debt, efforts – no matter how small at first – should be made towards increasing savings. As the amount of debt goes down, ideally, the amount of savings should go up. As debt principals go down, so, too, does the total amount of interest that is paid, and that monthly savings can be tucked away to become a gradually growing nest egg against the economic challenges that may be just over the horizon.

The reason that dealing with debt is an important part of insulating personal finances against recession is because in unstable economic times, personal situations can change suddenly and drastically. Lay-offs and other employment disruptions are common as businesses struggle to maintain their own financial well-being and profit margins. Creditors are likely to become much more aggressive in collecting their debts as more consumers default, increasing the chance of legal actions, such as the repossession of goods or freezing of assets, against those with outstanding balances. Thus, working to reduce debt, to enhance credit ratings, and increase personal savings levels now, while income is relatively secure just makes sense. That way, if something does occur to change financial status, such as a lay-off, there will be less debt pressure to manage.

The financial news is important news to the average consumer. Taking the cues from the headlines now to reorder financial priorities and move towards a fiscal position that will offer some protection if, indeed, the analysts that are predicting recession are right, can only offer long-term benefit. In other words, even if recession does not come, reducing debt and increasing savings is smart fiscal policy that will secure your financial future.

Source by Sharon Secor
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