However tenacious the recession turns out to have been, one result seems apparent: This downturn has produced a broad-based harvest of unemployed people.
Many companies are paring back due to economic pressures or "right-sizing" efforts to hit optimum operating levels. Now, as the laid-off workers look for jobs, they and their families are also juggling the strains of erratic or reduced income.How will they fare? Much depends on the plans made prior to their economic pinch. A solid reserve - most financial planners suggest an emergency reserve fund of three to six months' expenses - and knowledge of your cash flow will help, says Cynthia Forman, a faculty member of the Denver-based non-profit College for Financial Planning.
But even without a reserve, there are tactics for surviving a cash crunch:
- Keep a spending journal - even if it's retroactive - to determine how your funds have been spent. Include not only big-ticket items, such as mortgage, installment payments and grocery bills, but the cash dribbled away on everyday expenses.
- Reduce spending. Once you know your spending pattern, judge which expenses can be reduced or curtailed until full income resumes.
- Manage the timing of spending. Judicious monitoring of payment due dates can help, as will asking creditors to rearrange repayment schedules. Turn to cash or checks as your principal means of payment, and use credit cards only if you can pay the balance in full each month.
- Borrow against your assets before selling them. "Disrupting your investment program for a short-term hurdle may not be in your best interest," says Forman.
- Accept that you will probably have to put your savings plans on ice - and you may have to deplete some of your holdings.
"Be realistic," says Forman. "Especially in a financial crisis, people can't do it all. Trying to save at least 10 percent of gross income is a noble goal, but it's probably better to redirect that money to reducing or eliminating consumer debt."
To meet an emergency, borrow at the lowest interest rates possible, but remember that you'll be less than comfortable if your payments are greater than 20 percent of remaining income.
Borrowing against a cash value life insurance policy is a bargain; many carry an interest rate as low as 5 percent. Or, tapping your home's equity - using part of the funds to pay off consumer debt at a higher rate - should be considered.
This equity loan interest, subject to certain restrictions, is deductible from your income taxes.
At times, a bank will provide for a loan against your certificate of deposit, or you may take advantage of a 60-day "loan" from an individual retirement account. As a last resort, use overdraft or credit card cash advance privileges, but know that the interest costs are high.
The best borrowing arrangement may be the one most decried in our culture - to borrow on a short-term basis from family and friends.
- Define your survival standard of living and stick to it. When the financial crisis passes, stick to it for a while longer to build the kind of emergency cash reserve you needed this time, a cushion against any future ups and downs of income.
When you're back on your feet financially, consider building a second level of investment liquidity, beyond the cash reserve.