By Bob Jennings, CPA – Published by Auer CPA with permission
The sky is falling, the sky is falling! Chicken Little may have been right but could have been wrong. I think a major recession is coming, and soon, but even if I’m wrong (as I hope) these ten tools do no harm, they just take a defensive position without a negative consequence. So here they are, in what I believe is the order of importance. They all reflect my personal bias.
1. Budget, budget, budget. This life tool is the key to success whether there is a recession or not. Account for every incoming and outgoing dollar to enable you to set your goals, reach your goals, and show you where you can cut back if needed. There is an Excel budget worksheet on this year’s Elections, Checklists and Letters program.
2. Cash is king. Hold off on that new car or home improvement for a while and build a stronger cash reserve. Now is not the time to consume, it is the time to maintain and improve your conservative position. Go against the grain-if you have a 4% or lower fixed rate mortgage, just pay the minimum payment because inflation is much higher than the fixed dollar cost of the mortgage, and conserve the cash.
3. Save 25% on fuel costs with 3 simple habits. Slow to start, slow to stop and check the air pressure. Accelerate slowly and decelerate slowly. I went through the Arab oil embargo of the 1970’s and I know all of the tricks of improving gas mileage by 25%. At a time of rapidly rising gas prices, reducing the cost of transportation should be high on your list. 3 simple tricks can increase your mileage by 20-25%. Accelerate and decelerate as if there is a raw egg under the gas pedal and inflate your car tires 2-4 PSI higher than the recommended level. A little more tire wear will be offset by driving less when gas hits $6 a gallon by Christmas.
4. Pay yourself first. When budgeting everyone seems to list home and car payments first-change that order and budget in 5-10% of paycheck net to savings, and if you get a raise, put a portion of it into savings. This extra cushion will help tide you over any upcoming cutbacks or cost increases.
5. Maximize retirement contributions. This seems like strange advice, but if the stock market is in collapse it is the time to invest!
6. Get rid of credit cards. Use 1 card, search for a low interest rate, and leave it locked away to avoid temptation. Then, if you have other cards whose interest rate is higher than the inflation rate, work on paying them off first.
7. Do not use a home equity line for anything. If things get really rough and you miss a car payment they will repossess your car. If you were so foolish as to use your home equity for non-home items, and then you miss a home equity payment they will take your home. Which is more important your car or your home?
8. Prepare your Life Book. I talked about a Life Book in our newsletter of May 31st 2022. Read the newsletter, understand it and then do it-what a useful tool!
9. Never, ever, ever lease a car. A horrible financial decision at any time, it is even worse in a recession. Drive the old car another year or two. If it fails, buy a used car and keep it longer than normal.
10. Set a long term goal of being debt free at 65. This simple idea will free you from worrying about future recessions!
11. Yes, you get a freebie. Get that cash out of checking and put it anywhere else safe, Banks have been notoriously slow in raising interest rates, so go to an online money market account – it is still very liquid, but several are paying nearly 3% now versus bank savings accounts paying less than ½ of 1%
Bob Jennings is a nationally renowned author and speaker, presenting continuing education classes to over 100,000 tax professionals over the last 20 years all over the world. As the founder of his own regional CPA firm in 1984, Bob has dealt exclusively with individual and small business financial issues for over 30 years.
This blog was republished from Bob Jennings newsletter with permission. Learn more about Bob at TaxSpeaker.com
While it is impossible to predict the future, planning for the worst case scenario is never a bad idea. When thinking about a coming recession, it is helpful to reconsider your priorities and make some adjustments now in order to prepare.
At Auer CPA, we specialize in helping our clients plan for the future. We will sit down with you and take time to assess you financial situation, your business needs and discuss various ways that you can plan ahead. After all, the best defense against an unexpected economic crisis is preparedness.
Schedule a meeting with us today so you can be you can be ready to react quickly, whether you’re affected directly or indirectly by a future recession.