The ailing Irish economy won’t last for ever, but we will have to live with it.
Most of us will be affected one way or another, so now is the time to sit down and work out a plan of action.
A good way to begin is to imagine you and your family as a commercial enterprise. Small companies have been in the news lately as an unprecedented number have ceased trading in the recent past.
Learning from their mistakes, how can you ensure that – unlike them – you stay in business? The theme behind most of the steps that we list below is flexibility.
There is not much fun for anyone in a recession, but the main point for most of us is that we will be shaken by forces that we are powerless to stop. In this situation, you need to take control where you can, and leave open as many options as possible.
Remember that the easiest form of borrowing is also the most expensive. And remember that however anxious you are to get out of a hole and make a quick euro, don’t ever take a risk that you might think twice about in good times. That is the quickest route to financial disaster.
Your overall aim should be to have as few hostages to fortune, and as many good bargaining points, as you can. That way, you will survive, perhaps even thrive, in the tough times ahead.
1. Safeguard your income
Your first priority is to keep the money coming in. That is easier said than done, of course. People who are made redundant do not usually have a choice.
But anyone contemplating a career move now should think carefully about whether the new company is secure. If it involves moving house, be careful about commitments you take on. Selling may take much longer than you think and having to pay two mortgages can be crippling.
If you are staying put, it may be worth making an extra effort in your work. Being modest in your salary negotiations may be more realistic than defeatist.
And it is worth considering what you would do if the worst happened. Working out a contingency plan now is easier than when you are in a state of shock.
2. Reduce your borrowings
Small firms have been failing because of the high level of borrowings.
Borrowing to pay for consumer goods is foolish. You may persuade yourself that you are getting a bargain by making a purchase now. That may be true; but you must assess the extent of that bargain and your consequent loss of financial flexibility. You might come across an even bigger bargain in a few months. To put it another way, the bargain LCD TV now might prevent you buying the replacement washing machine later.
Most justifiable, perhaps, is borrowing to invest in capital assets – which for individuals principally means their house. If you are using “investment” as the justification for taking out a bigger mortgage, consider that argument ruthlessly.
You may think the property you want to buy is genuinely underpriced. How good a judge are you? In some areas prices have fallen far more than anyone imagined; even professional valuers have been caught out. Be cautious. There is one circumstance in which it may be sensible to increase your mortgage or take out a further loan. That is if you are using it to replace more expensive borrowing. But such “refinancing” needs to be undertaken with the greatest of care.
If you must borrow, a secured loan such as a mortgage is the cheapest way. But consider first whether you can cope in other ways. Mortgages cost money to set up (legal, valuation and arrangement fees) and may be inflexible.
Can you repay your credit-card debts by a few months of self-denial? If so, do. If not, remortgaging may be sensible, but take care. Aim to keep at least 20% free equity in your house, using the new valuation, however conservative this may seem compared with what your house was “worth” before.
3. Invest for the future
We have all read how industry failed to invest properly in plant and machinery in the good years and about the long-term harm this has done.
Your largest “long-term investment” is your pension. Skimping on that now, however tempting it might seem, will damage your long-term financial prospects in a way that may be irrecoverable.
Apart from the fact that there is an annual limit to the savings that can be put into a pension, there is an almost inescapable psychological rule, that people rarely make up the opportunities they have lost in the past – at any rate, until retirement is looming and it is too late to be of real use.
Of course, it is easier to put money into a pension when there is enough cash for luxuries as well; but the key to this exercise is to get your priorities clear.
4. Get your books straight
Think of some of the recent spectacular crashes and the cries of anguish from the liquidators as they struggle to make sense of a chaotic administration system. Chaos in the “back office” is certainly a symptom, but probably also a cause, of financial collapse.
How does your own system measure up? In the good times, you may hardly need one. Any messes you get into can be solved by the next pay cheque or the next pay rise. But you may not be able to rely on this in the future.
If you sort out a household budget now, and build into it the cost of replacing big items such as a car you will be more in control and better able to cope with tough times ahead.
One of your jobs as your own financial director is to review insurance. It is essential that you do not treat this as an optional extra. Insurance is there to protect you against disasters; it is more important now than ever before.
5. Control your overheads
It’s easy to see how companies get into trouble when their overheads run out of control and stocks pile up. But it’s useful to think of your own financial situation in these terms as well.
First, let’s take overheads. Borrowing costs are a large part of these, but there are others. If you are about to replace your car, for example, put the running costs to the top of your list. If you are planning your annual holiday, consider a cheaper alternative to your usual destination.
If you’re thinking of some big capital expenditure consider putting it off for a year or two. The additional heating costs once you have it will be easier to bear when you return to pay rises that exceed inflation.
What about stockpiling? Well-run companies spend a lot of time and effort in keeping stock under control, for the simple reason that it represents “useless” money tied up and not earning anything. Your first targets in this sphere should be:
- Money in an ordinary current account, where it does not earn interest.
- Money in deposit accounts paying less than the going rate.
If you have a second/holiday home, consider making it pay for its keep by renting it out.
It is probably not a good time to liquidate your “stock” of investments, but consider cost of finance. If you are struggling to meet credit-card interest, think carefully whether you can raise cash from an investment to pay off the capital. In terms of overall return, this could be the best thing to do.
6. Check your suppliers
Alert companies are checking out their suppliers and negotiating better terms. You can try negotiating as well and you may find you are pushing at an open door. But just because some companies are desperate to sell their goods or services, so you should be more wary about who you do business with.
Take, for example, those companies that stick leaflets through your door offering roof treatments, double glazing and central-heating installation. You should never pay for these items in advance, not even a deposit. The bigger the inducement, the more precarious that company could be. You could be the unlucky one who parts with cash just before the company collapses.
If you are buying large items in shops, pay by credit card to ensure you are covered if the retailer goes bust before you take delivery.
Related Article: Spring Cleaning Your Personal Finances
Please call Seamus Parfrey today on 021-4310266 if you need further information on ways to ride out a recession or a free consultation.