If the Recession is Over, What's Next?
12/01/2009 - Many economists and government representatives tell us the recession has ended. An official declaration based on economic statistics may be months away. And, while individuals vary in their predictions, there is a general expectation that the economic environment will gradually improve over time.
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As we encounter more signs of vitality – increased hustle and bustle in stores; fewer For Sale signs on your block; and, eventually, an upswing in employment rates – what's the best way to react? Should we return to "business as usual," or should we use the experience of the recession to guide our financial decisions going forward?
Here are some suggestions on how to manage your financial life in a post-recession world:
#1 – Be a Smarter Consumer
This wasn't called the "Great Recession" for nothing. The unemployment rate reached its highest level in 25 years. Many homeowners found themselves facing foreclosure. Consumers were caught carrying too much debt. Even the country's financial system required massive infusions of government money to avoid a major crisis.
As a consumer, your biggest lesson should be to remain vigilant about controlling your expenses, even as the economy brightens. If you found yourself falling deeper into debt during the recession, safeguard yourself from a similar fate this time around. Scrutinize your spending habits. Even if you have felt deprived of some of your favorite things (dinners out, regular stops at the gourmet coffee shop, travel plans), resist the temptation to revert to those same old spending habits unless you can really afford them.
A good rule to live by is to only spend money that you have. Try to avoid putting purchases on credit cards unless you are able and willing to pay off the bill on time each month when it arrives. This will help you avoid some of the same problems the next time the economy goes through a rough patch.
#2 – Prepare for Emergency Needs
One positive trend to emerge from the recession is that more Americans are putting money into savings. Make sure you have adequate emergency reserves to meet short-term income needs. The value of an emergency fund has become especially apparent after seeing a number of Americans lose their jobs during the economic downturn. You should try to build emergency savings equal to at least six months worth of expenses. Given the risk of extended periods of unemployment, it may even make sense to have the equivalent of nine months worth of living expenses set aside.
You may also consider making sure you are properly protected from potential financial loss. This is important regardless of economic conditions. Assess the status of your current auto, home, life and disability income insurance policies to make certain you will be adequately protected if an unforeseen event should disrupt your life.
#3 – Keep Up Retirement Plan Contributions
If you are still working (or have returned to the workforce), it is important to make regular contributions to a workplace retirement plan (if offered by your employer) and/or an IRA. Facing a financial crunch as the recession took hold, many individuals halted contributions to their retirement plans in order to increase their take-home pay. If you can afford to resume retirement plan contributions, you should do so. It provides you with notable tax advantages and will keep you on track to achieve your retirement goals.
#4 – Focus on Personal Growth
The recession serves as a necessary reminder that nothing is certain and, if we aren't careful, our financial security can disappear in the blink of an eye. A number of people who never would have imagined losing their job found themselves among the millions of unemployed in the past two years. Even if you managed to keep your job and your income intact, consider the post-recession period an opportunity to be better prepared for any eventuality.
We all hope that an improved economy will relieve some of the anxiousness we feel about our financial lives. It is also a good occasion to achieve greater financial wellbeing for any challenges that lie ahead.
This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors.