How to act during a recession.

This is a follow up to my last entry, which was rather somber. Sorry about that but these are somber times for some people. Although this doesn't necessarily apply to us here in NZ, newsweek published an article about how to survive the recession. I think it's a good read because we can apply some of the tip later on when we are in a recession (or even now since there's a chance we're going to enter one. Some of the good points in the article are:

Leave your retirement investments alone: Right now the share markets are spiraling downwards because of the credit crisis in America. But this isn't a reason to sell since they'll rebound and in 20 years or so you wont notice the loss since your average return will be high. In fact, if you make regular contributions, now would be a good time to make extra contributions since the price of shares now are quite a bargain (relative to probable prices in the future). If you have kiwisaver you can do this easily through internet banking.

Pay down costly debts: This is what I was talking about in my last entry. This applies in good times as well as bad. Since interest rates are so high at the moment, now is a great time to get them paid off.

Stretch out cheap debts: If you have a cheap interest rate, banks and companies will probably be willing to waive fees for voluntary repayments. Why? Because it's a liability for them. They can borrow out that money at the current higher interest rate. People would be willing to pay you to have debt at your low rate, so make sure you take advantage of it and keep it for as long as you can. If you can make extra repayments, pay off other debt if you have it, or put it in the bank (if the interest rates are better), use it towards an emergency fund, or buy things you think you will need in the near future. Take advantage of the cheap debt (it sounds bad, but it really isn't).

Hunt for bargains: The stock prices of the majority of companies has dropped. Some haven't been affected by the credit crisis and have just artificially dropped because of investors' fears. So there are a lot of bargains out there waiting to be discovered. But you must research and understand the company is undervalued before buying a bulk of their shares since it goes against diversity principles. This leads to the next point...

Avoid the urge to get more adventuresome with your investments as a way to make back losses: Were you planning on investing in gold before your portfolio dropped in value? Or are you doing it just because everyone says you should? Or what about derivatives? Or even bank bills if you have a lot of money? NO! Don't try to make up losses by investing in something you don't understand. Go to a professional investment advisor before you do something like that and make sure you understand the risks, the possible returns, and whether it's a good addition to your portfolio before doing anything like that. Otherwise you may as well go and play roulette at the casino. The odds are probably the same except you'll win or lose in a few seconds instead of a few days...

That's some points the article brings up. Do you have any tips of your own? Please share them...

How much debt are you in?

I was reading this article at newsweek.com when I got thinking. I pose the question to you, "If you suddenly had 30 days to repay all the loans (mortgage, credit cards, hire purchase, etc), would you be able to do it?

Maybe you could, maybe you couldn't. If you had a mortgage, chances are you wouldn't be able to unless you sold your house. Hopefully you can if you just took into account your other debt, if you can't, maybe you should look at trying to reduce the amount of debt you have (although you probably already are). Pay the minimum amounts on the lowest interest debts and pay off the higher interest debts as fast as you can. Be more frugal so you can do this as quickly as you can. Or think about getting a debt consolidation loan where all your debts are put onto 1 loan (with hopefully a lower average interest rate). Just remember to cut the credit cards up and never get any more loans otherwise you'll end up in a position where you'll become bankrupt.

You probably have all seen the news where people in America are living in tents because they've had their houses foreclosed because they couldn't make their payments. I sincerely hope this doesn't happen to anyone since it must be such a horrible position to be in. Let us try and learn from this that times are not always rosy. The banks do not always give loans out because they are certain you can pay it back. You never know when you may lose your job, not because you're not skilled at it, but because the labour market tightens and the firm can't support the amount of staff it has.

You should think about saving to have an emergency cash fund, which is completely liquid and safe. A good amount to aim for is 6 months living expenses. This would include rent/mortgage payments, food, petrol and other essentials you require. Then, if times are ever bad, you have a lifeline for things to get back together. This will give you peace of mind, something alot of people would love to have considering their finances may be keeping them up at night.

What do you think? Is an emergency fund a good/bad idea and do you have one or are you considering having one? How many months living expenses do you think is a reasonable amount to have?