Sunday, November 18, 2007

Be Thankful for No Recession in 2007: Get Prepared for One in 2008 (and hope it doesn't happen!)

Well, this week millions of American families will sit down to a feast of turkey, stuffing, cranberries, etc. It has been another prosperous year for the US economy so far, so those tables should be full. GDP grew at a seasonally adjusted annual rate of 0.6%, 3.8%, and 3.9% in Q1, Q2, and Q3 respectively. However, some economists are worried about the outlook for 2008. Indeed, an article in the Economist this week suggests a number of reasons we might get one in 2008 including: falling housing prices, tighter lending standards, higher debt loads, higher fuel costs, and slowing job growth. For the uninitiated a recession is typically defined by two or more quarters of shrinking GDP. During a recession you tend to see a decrease in consumption and an increase in unemployment.

What could a recession mean for you in 2008? Could it mean widespread corporate layoffs that might include you? Could it mean a terrible stock market that hurts the value of your portfolio? Could it mean you won't get that raise you are counting on? It could mean any of these things. So, with even a modest risk of recession, it makes sense to start getting prepared now. Between tryptophan induced naps and football kick-offs this weekend take some time to think about how your finances would weather a recession. Do you leave yourself some buffer so you don't need to live paycheck to paycheck? Do you have 3-6 months salary saved in a money market or treasury account? If you lost your job and had to take a lower paying one could you and/or your family get by for a year? If the answer to any of these questions is "No," it may be time to pass on another helping of pumpkin pie and get out a piece of paper. Write down some goals that will help you get to "yes" on all of the questions above. Doing this should be simple, write down how much you can start saving every week by cutting down on some of your discretionary spend. Cut out enough discretionary spend to get yourself to "yes" over the next 12 months. Post the plan somewhere where you will see it daily and stick to it. Once you do this you can rest assured that your 2008 Thanksgiving feast will be just as good this year's, recession or not.

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