Recession Survivor Tools
Monday July 23, 12:40 PM
Recession Survivor Tools
Times are bleak. We all know that. You just need to scan the newspaper headlines everyday, and you will be depressed by news of dismal earnings, losses, and retrenchments. By the way, these days, it's not cool to talk about RECESSION. "Technical Recession" sounds a lot more palatable to government officials rather than full-blown recession. As for the media, don't even say the word recession. It's the "R" word for you.
Then you hear horror stories from doomsayers of how this recession is going to be worse than the 1997/98 Asian financial crisis. It's going to be more like the 1985/86 recession. That was a bad one.
But what exactly do you do to prepare yourself for such tough times? Here are some tips which would help you gear up for the worst. Are you ready?
The Importance of doing a Personal Audit
You really won't know where you stand unless you do a personal audit. Personal Audit means doing a thorough and detailed examination of your own financial health. It's like treating yourself as a company and going through your personal financial statements. Do you really know exactly how much you're spending each month, and what exactly you're spending on? If you don't already know, now is a great time to find out.
There was a survey conducted by NUS and Citibank where they polled 500 Singaporeans with monthly salaries of $2,000 a month. Their conclusion was that 65% of Singaporeans have an inflated sense of confidence that they are in control of their personal finance. So, unless you do a personal audit, you really don't know if you're in control of your personal finances or not.
How do you do that?
Monitor all your Expenses for an Entire Month
This involves carrying around a little notebook and recording every single cent that you spend each day for an entire month. It's a little like someone going on a new diet, and needs to monitor her every single calorie intake. And of course, at the end of the month, you total up everything and categorize them, and work out the percentages. And most of the time, you will be pretty terrified or amazed at what you're spending your money on. Most of us would be screaming like the woman on the left when we actually see how much we spend on a daily basis, and on exactly what items. That's why we recommend you to just do it for one month. Most people don't have the stomach to do it a second month. It's too agonizing.
The most important thing is to write in every single expenditure and not give yourself excuses for not including certain items. You must put in every single cent that you spend, including those paid using your credit card. Like a Company, unless you know what your monthly expenditure is, how will you know what to cut back on, and by how much? So, try to be as objective and as accurate as possible.
What I find most useful is that after you tabulate everything, come up with categories for the items, such as food, clothes, shoes, jewelry/accessories, makeup, toiletries/personal care products, vanity treats (facials, manicures, pedicures, etc.), entertainment, dining out, and so forth. Then you calculate the percentage of your total expenses that go into each category. This is equally eye-popping. Most people don't realize how much they spend on things like makeup, clothes, shoes, or dining out. But when you have to do a personal audit, it is usually quite numbing to see yourself.
Set up an Emergency Fund
If you were to lose your job, how long can you go without being employed? The rule of thumb is to set aside 6 months your present salary. And then if you get retrenched, it is not such a bad thing. At least you won't feel pressured to grab the first job that comes your way even though it's not suitable for you.
This buffer amount is something that we are all aware of, but few of us actually practice it. Set aside at least 3-6 months your current monthly salary as an emergency fund right now while you're still gainfully employed. Do not touch it unless you really have to. This emergency fund will come in handy if in the event you get laid off by your Company, or if you decide to leave your current job to consider other career options. Given the present economic conditions, you never can tell how long it's going to take you to find your dream job.
Monitor your Debts
Here are some types of debt that we need to talk about.
Credit Card Debt
Are you carrying a huge credit card debt? Pay it off!!! Most credit cards carry an interest of 18% per annum. That's definitely more than the returns in most people's investment portfolios. In fact, Warren Buffet, the most famous billionaire investor in the world, gets an average return of 20% in his investment portfolio, and in a recent report, his portfolio had a return of 17% in year 2000, which was considered remarkable by most retail and professional investors which had negative returns. Meanwhile, some of us are walking around with 5-6 credit cards, carrying an 18% interest per year, on each credit card.
Pay them off, and stick to just 2 credit cards, or 1 if you can't control yourself. Most people draw cash from credit card A to pay off credit card B, and then the debt just snowballs. That's a really bad habit that's easy to cultivate and a real hard habit to break out of once the cycle begins. During the last recession, you must have heard of people getting declared bankrupt for a $2,000 credit card debt. And if you read the Notices in the Straits Times you will see a lot of those popping up these days, and you will be amazed at how young some of these individuals are.
Home Mortgage
Some of us are highly leveraged - servicing a home mortgage as well as a car loan. These are considered fixed costs that you need to pay every month. The rule of thumb is that your home mortgage should never be more than 30% of your monthly salary. This way you will not be too highly geared and will still be able to maintain your present lifestyle.
But it's not uncommon to find people with at least two thirds of their salary (including CPF) going into the payment of mortgages. That's why you hear people saying things like, "I can't go for a single month without a job.
So what should you do if you find yourself in this position? Discuss with your spouse. Imagine the worst case scenario - if one or both of you were to lose your jobs or your business, can you still afford to finance your home mortgage payments? For how long? If you can't then, is it a better idea to sell the house even if it's at a price below your purchase price, then downsize, i.e., move to a place that's more suitable to your reduced budget, or maybe even consider renting a place until you're more financially stable. These are some considerations.
Car Financing
If you're financing both a house and a car, and you're feeling very insecure about your job and hence, your ability to pay, this be a good time to sell your car. At least, that is one less worry you have to deal with, and will help reduce the debt burden a little.
Bear in mind that a car is a liability - it depreciates 20% as soon as you drive it out of the showroom. If you bought a brand new mid-sized car for $80,000, the minute you drive it out of the dealer's place, its value would have depreciated by approximately $16,000.
What are your Sources of Income?
For most of us, our only source of income is our monthly salary. That's why during a recession, most people are worried that they will lose their jobs. Millionaires are never worried about losing their jobs because they are not dependent solely on their monthly salaries as their source of income. They understand the practice of having multiple-income sources.
There are other forms of income besides your salary. How many of us actually have any of these?
Portfolio/Investment Income: stocks, bonds, mutual funds/unit trusts, etc.
Stocks: Some stocks have fallen to attractive valuations. In fact, according to a report in The Business Times two months ago, over 80% of the stocks on the SGX are now considered penny stocks (stocks below $1.00). So buying 1 lot=1,000 shares will only be a few hundred dollars.
For example, Aspial's stock price is only at 30 cents per share. 1 lot = $300. If you buy 3 lots of Aspial stock, it will be similar to buying one Purple Gold ring at an Aspial boutique.
Unit Trusts or Mutual Funds: If you're not planning to buy a big ticket item like a house within the next 3-5 years, this is a good time to use your CPF money to buy unit trusts. The new CPF Investment Scheme allows you to use up to 100% of your CPF savings for unit trust investments. That is great because you won't be tempted to withdraw the money and spend it.
Passive Income: most typically, income which is self-generating such as rental income or income from royalties, patents, etc.. What can you do to earn passive income? By the way, passive income will probably become a main source of income when you retire. Because when you retire, it basically means that you're no longer earning a salary. Property prices have dropped. Is this a great time to go property-hunting?
Say, you invented something such as a durian opener and patented it, and companies are willing to pay you royalties for the right to use your durian-opening technology for commercial purposes, that would eventually be your passive income. If you wrote a great song that was sung by Ricky Martin, or a best-selling novel that was picked as one the Top Ten of Oprah's Book Club, you could be earning royalties for years. But okay, admittedly not everyone can be a great song writer or author. So, we have to use our creativity to think of ways to generate additional sources of income for ourselves.
A little note of encouragement: with desperation comes creativity.
Pick Up Some Financial Skills
But if you've never invested before, this would be a great time to pick up some financial skills. We've always been too busy before. But now that we have more time, we should spend time to learn these skills. You could actually sign up for some workshops or buy/borrow investment books.
(a) Learn how to read Balance Sheets, Annual Reports and IPO Prospectuses.
(b) Understand certain financial terms such as ROE, PE Ratio, EPS, Profit Margin, etc. If it sounds like gibberish to you, then it's time to learn.
Even if you don't subscribe to the do-it-yourself investing formula, it would be great to understand those terms so you know what your broker or financial advisor is talking about when he or she hurl those sophisticated financial terms in your direction during a conversation. You will also be able to benefit more from their advice and more actively participate in the creation and management of your investment portfolio.
Reflect on Your Life
This is the time to take stock and find out where you stand financially, and where you would like to be 20-30 years down the road. When it comes to building wealth and financial planning, you have to think long-term 20-30 years ahead, not 3-6 months. Stick to your plan.
Creative Ways to Save
Find another form of Therapy other than Retail Therapy.
Most of us feel happy when we go shopping and wearing new clothes is a form of dispelling Monday blues. Or, when we buy a large cappuccino or cheesecake to cheer ourselves up when we're depressed. I did a little calculation: For example, I drink 1 Large Latte @ $5 everyday. If I reduce that to just once a week, I would be saving $30 a week x 52 weeks = $1,560 a year.
I could actually invest that money and earn some investment income from this. If I invest in a stock or unit trust and I get a return of say, 10%, I would be able to more than double the original amount to $3,700 in 10 years.
There was a study by Fortune magazine that said: if a 40-year old couple were to eat out and watch a movie twice a month instead of 4 times a month, by the age of 65, they would have netted $150,000.
Live below your means.
This is easier said than done. But it's something that successful millionaires subscribe to. If you earn $5,000 a month, spend as though your salary is only $3,000 a month. Then invest the difference. Think about it: You save $2,000 a month and in 1 year, you would have saved $24,000!
Have a regular savings plan
If you haven't started one yet, this is a great time to start one. Put aside a small amount, say 10-15% of your salary each month toward saving and investing. In fact, most unit trusts have a regular savings plan where each month you can put as little as $100 into a unit trust. It's called dollar-cost averaging which means that over time, you would be paying less for the stock because you would have bought more units when the price is low.
A small amount each month really does add up. Think about it: $2,000 a month savings leads to $24,000 a year, and $120,000 in five years. If you invest it in some stocks and unit trusts that yield an average return, say, conservatively speaking, of 8% per annum, it will be as follows:
1 year - $25,920
2 years - $53,914
3 years - $84,147
4 years - $116,798
5 years - $152,062
Think of an Alternative Shopping List
This will come in handy when you're trying to cure yourself of retail therapy. Say, you fall in love with this really beautiful handbag, and it has a price tag of $300. What should you do? Think of the stocks you can buy with that money? 1,000 shares of a 30 cents stock; 2 lots (or 2,000 shares) of 15 cents stock; 3 lots of 10 cents stock.
--------------------------------------------------------------------------------
Copyright © 2001 WallStraits.com! All rights reserved.
Copyright © 2001 Yahoo! Inc. All Rights Reserved. |
