A couple weeks ago I reached out to my colleagues and friends and asked them to challenge me by sending questions regarding finance and/or economic issues that they were unsure about (I sis not receive any questions about the Cubs).
Their responses were many and varied:
1.)How can I be recession proof?
2.)What is leverage?
3.)What, if any, are the benefits of using credit?
4.)How does a country get into debt? Who is that debt owed to?
5.)How do people dodge taxes using off-shore bank accounts?
6.)How does money laundering work?
7.)What are the details of the SEC case against Goldman Sachs? Is Paulson just getting away? Are other investment banks soon to follow?
8.)What do I do with my tax return?
I will attempt to answer these questions.
So now I will start with Question 1:
HOW CAN I BE RECESSION PROOF?
Being recession proof can mean many things: not being laid off, balancing your finances correctly (improving credit score, paying bills on time, etc), not being "underwater" in your mortgage, having money in the bank, not being over-leveraged in unsecured debt, etc,etc.
All of these are important and vary by person.
Personally, I like to think of being "Recession Proof" as the following:
The key to being "recession proof" is the ability to absorb economic shocks. To effectively absorb shocks, you must balance your finances effectively.
Balancing finances effectively means saving, preparing, and paying debts on time and in full (which strengthens your credit score...more on this in a later blog).
I have the following accounts:
-Checking
-Savings
-Credit
-"Oh Sh!t"
Let me explain.
My checking account acts as a gateway; money comes in, money goes out. I DO NOT use it as a repository for money. I pay ALL of my expenses with this account. I also use this account for spending. I even pay my savings account with this account. Sometimes after my expenses/savings are taken out, I will have money left over, when that is the case, I dump it into either my savings or my "Oh Sh!t" account (more on this later).
My savings account acts as the repository for what I am saving for. Currently, I am saving for two major purchases: a house, education. Neither of which I can go wrong with (well, maybe the house thing...but that's another blog).
My credit account(s) are the unsecured debt that I owe. Currently, I have zero-ZERO-credit card debt. That doesn't mean I do NOT use my credit cards, oh believe me, I do. This means that whenever I use them, I pay off the balance. This is key to being "recession proof", you CANNOT have a high amount of bad, unsecured debt. Is it realistic not to have any credit card debt? Absolutely not. I will probably have some type of unsecured debt in the future, but managing it effectively (paying off more than the minimum payment, higher interest rates first) would be an effective strategy when that time comes.
And now we move onto the awe inspiring account;
The "Oh Sh!t" account. This account has many names, though I think "Oh Sh!t" suits it well. This account takes care of the unexpected expenses: Doctor/Dentist bill, flat tire, break pads, birth control pills, school books, fees, etc, etc. The reasoning and how much you put into this account can be many and will/should vary person to person (especially depending where they are in life). Personally, I think anywhere from $1000-2000 is effective for your "Oh Sh!t" account. It may not sound like much, but I believe it takes care of the aforementioned items WITHOUT dipping into my savings. REMEMBER-this is NOT a savings account. More like an "Oh sh!t, I wasn't expecting to purchase the Morning After Pill" account. Some people use their credit account(s) for this; I do not have a problem with this and will discuss further.
Which leads me to this, you should NOT be dipping into your savings!
Sure. You have debts. I understand. Payoff the higher interest rates first. While doing this, do NOT forget to pay yourself (put money into savings or into the "Oh Sh!t" account(s)). If by unfortunate circumstance you have to dip into the savings/"Oh Sh!t" account(s), you MUST PAY IT BACK. These are your cushions. These help you absorb shocks.
You owe yourself money before anyone or anything else.
Remember that.
Some of you may disagree with this approach; some of you think "well I manage my credit cards well and I use them as my "Oh Sh!t"/spending account(s)". I understand this logic. Occasionally I am known to use my credit cards as my spending/"Oh Sh!t" account(s). I have no problem implementing such a method. But I will argue against this method if you aren't paying the balance off IN FULL.
Some of you may have 9 months of salary in your savings to cover rent and other living expenses which, according to Suze Orman, we need to have in case we have a job loss. To those of you that have this, you are on the right track. For some, having 9 months of salary is extremely difficult to save for in an unstable job market, increasing student loan debt, life expenses (engagements, weddings, kids, pets, cars, mistresses). The point is, have something. Three or four months is reasonable. Sure, you may not have the financial backing to absorb an unexpected shock, but it wont be as bad if you had nothing saved.
In summary, save. Live within your means (DO NOT order that glass of Johnny Walker Blue Label no matter how tempting it may be). Payoff your balances (higher interest rates first) IN FULL. Prepare for the unexpected (job loss, unexpected expenses) but most importantly, pay yourself first and you too can be "recession proof".
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