How Do I Survive an Economic Downturn?
Financial trials and headaches for your business will continue to occur for as long as you own your business. Staying ahead of the game is essential. Although one cannot truly buy insurance against a down economy, there are tried and true practices to keep in mind to help defer and hopefully avoid many of the negative repercussions a recession brings. Slow economic growth, higher unemployment rates, a down real estate market, tightening credit and underwriting, as well as higher inflation rates are all characteristics of a downward trend in our overall economy. Many of these issues pound us in wave after wave of tsunami like fashion, berating us emotionally and challenging not only our dreams but also our very livelihood.
“As a Duluth CPA for decades we have watched Gwinnett and Metro Atlanta business owners unduly struggle with a down economy for failing to prepare is preparing to fail. Constantly thinking ahead allowing for extra cash needs, down turns in business and collections and having a line of credit are all essential components of sound cash management and overcoming any business economy.”
—John Dillard CPA
Much of what one does during a down economic time will either positively or negatively impact much of what occurs during this time. However, it is perhaps much more important what you do as a practical matter in your everyday living and spending habits which are most critical. By consistently applying these precepts and techniques to your spending habits, you will invariably, after a time, adopt much of these into your psyche thereby improving both your business and personal net worth and financial security.
Be Diligent. Life, as well as our financial security, is indeed a journey rather than a destination. Any missteps along the way will cause delays and undue roadblocks in achieving some semblance of financial security. Frequently, there will be many ebbs and flows in the stock market as well as the overall economy. Your goal along this path will be to avoid any miscues that you create yourself. Frequently, even one bad decision can lie to waste even the best-laid plans. Accordingly, you will want to obtain and seek out wise counsel in helping you stay the course. Just as an airplane makes thousands of minute corrections along the way, so too will you want to be diligent to ensure you do not de-rail your own efforts and planning.
Monitor Small Outlays. Keeping tabs on the little things are what makes good companies great and what allows us to save little by little towards greater financial freedom. Just as an athlete rehearses all their mechanics over and over again, focusing on each individual step, so we should train ourselves to be wise stewards of our God given resources. Recurring monthly expenditures are a specific area in which we can easily see how quickly our spending can get out of hand. In evaluating what might otherwise appear to be a relatively nominal monthly expenditure, it is useful to go ahead and “do the math” learning what a particular expense will result in as spending over the entire year by multiplying the monthly amount times the twelve months in a year. To then evaluate this expense further it is prudent to add up what a particular outlay will cost us over the next ten years. By expounding on and reviewing the total of future outlays, we soon can see and discover that what we once thought to be a relatively minor monthly outlay is in reality an expenditure, and if incurred, could easily cost from thousands to tens of thousands of dollars.
Expect problems. Jobs will be lost, unanticipated medical expenses will be incurred and the stock and housing market will fall so quickly it will appear as if the bottom fell out. It is during these times which we will need a reserve to pull from in order to address those larger un-timed catastrophes. Although perhaps we all feel ill fated when such calamities arise, in reality they are all part of the process and the journey for which we all find ourselves. Though many will advise you to have an emergency fund to fall back on, this solely, in and of itself is not sufficient for the longer-range views of life and its attendant financial needs and requirements. Accordingly, one should detail out their respective funds by designating certain funds for their true intended use. Accordingly, it is wise to maintain a:
Rainy Day Fund. This fund should be approximately four to six months of necessary living or business expenses to address any substantive unanticipated drop in monthly income.
Dream Fund. Whether your dreams are big or small, local, national or international, missions or vacation, you will want to save for the day when you make some or all of your dreams come true. Typically these monies will be saved in non-qualified (not tax deferred) accounts and for which the accounts investment philosophy should match the time horizon for your goal. To wit, you would not want to invest in the stock market for monies you would desire to be using in the next six months. Conversely one would not want to be unduly conservative by investing in a money market account for expenditure years and years into the future.
Retirement Fund. These will be the monies you will utilize to live on upon reaching retirement. Though much of these resources will be provided by qualified monies, (pre-tax plans such as 401K, Simple or IRA), there could be several other sources of these funds as well – such as other investments in real estate, second residences, stocks, etc.
Capital Expenditures Fund. Cars will always have to be replaced, homes will occasionally need to be replaced and other necessary larger living expenses will frequently arise and one needs to be well armed and funded. These monies are to be kept separate from our rainy day fund as those funds are for unexpected calamities whereas issues, saved for in this fund are for items we know will transpire. For many of the funds above, the monies can be co-mingled into investment accounts well suited for their intended purpose. However, care should be taken and well written and documented to ensure that each and every plan is planned for.
Credit Insurance. Much has been made in the news about reviewing and protecting your credit score, as well we should. However, little is discussed of other critical steps that should be taken to ensure your financial success.
Pay Your Bills Early. By paying your monthly living expenses before they are due, you are able to help ensure they will never be late. Also you will avoid the false security that comes from having monies in your account, which in fact you truly owe to someone else.
Get An Equity Credit Line. Most banks and savings and loans will establish an equity line of credit on your home that you can utilize in a time of need. Though fortunately most homeowners will never have a fire, most all of them carry fire insurance and pay a premium accordingly. An equity line is almost always free to the user, as the bank will typically pay all the associated closing cost, thus giving homeowners an extra layer of protection to ensure their financial future. It is not recommended that one with such a line use it frequently but rather as a backup when monies in the appropriate funds are not otherwise available.
Develop Spending Limits. Just as when you pull the trigger it is most impossible to stop, slow down or even change the direction of a speeding bullet, it is equally difficult to change the effects of a financial commitment once they are made. Accordingly it is wise to carefully consider and evaluate purchases, especially those over your defined spending limit, before a financial decision is reached. If you are married or have a business partner, it would be prudent to agree on a specified limit that is allowable to spend without the others consent, however, anything over that limit should be discussed before any expenditures are made. This limit should be as low as possible to both ensure agreement and to avoid any unnecessary expenditures.
There is no better tried and tested way for personal budgeting and financing. Use these spreadsheets again and again until it becomes second nature. If you are married pick a low number (I suggest $75 or less) that both of you have to agree on before a specific expenditure is incurred. Also always keep in mind that credit cards are never to be used as a financing vehicle but only as a tool, and should always be paid off in full whenever possible.
Recap of Cash Flow (Excel Spreadsheet)
Monthly Variance Analysis (Excel Spreadsheet)
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