Are You Ready for the Recession to End?

by Kevin on February 24, 2009

I promised that we would take about more peer-to-peer lending today, but I ran out of time last night after my MBA class to write the next article. We’ll talk about that tomorrow.

This is a guest post by Dave from Do You Dave Ramsey?, a personal finance blog featuring entertaining and thought provoking articles based largely on the his personal experiences.

So, are you ready for the recession to end?

Of course you are eager for it to end, if for no other reason than to reset the news cycle, but are you ready for it to end?

Pundits will typically agree that when recovery strikes the stock market will quickly recoup as much as 30% of its losses in a short period of time.  While this is neither an endorsement nor invitation to time the market, it is a subtle scream to stay in the market or to get back in if the recent downturn scared you away.

An article in the March issue of SmartMoney lamented an estimated $600 billion of parked money simply waiting for its owners to clean-up and recover from their most recent self-soiling.  Keep in mind that this money is not savings or cash reserves.  Rather these are separate funds being held in sweep accounts.  Money which might typically spend 24 or 48 hours in these accounts is being held for months and months while earning almost zero interest.

At first sign of recovery, many itchy trigger fingers will be poised to pour this money back into the market, thereby creating an almost self-fulfilling uptick.  But the irrationality of rational markets is a topic for another time, our objective today is to ensure you are best prepared for sunnier days ahead.

We will accomplish this by exploring 3 interrelated check points:

What is your debt profile?

The beauty of debt reduction is that it never goes out of style. (Editor’s Note: Amen!) When times are good, being debt free enhances the liveliness of the party.  When they are down, as they are today, being debt free enhances your family’s ability to survive.  More fun and survival, hmm, where’s the downside?

So where are you today relative to debt?  If you are like most folks your answer may simply be ‘yes’.  So the game plan is pretty straightforward, eliminate debt.  Tighten up your budget, map your debt snowball, and set the course for debt freedom.

The default setting for this journey’s pace is full steam ahead.  But consider the following points to help dictate the pace that is right for you.

What is your cash position?

Are you sitting on extra cash?  Extra defined by a total larger than a 3-6 month emergency fund?  Did the cash come from a recent panic induced flee from the stock market?  If so, you are better off putting the money back.  Why?  Well, it is really simple, but requires a patient hand.  If you lost $20,000 in the recent downturn, return the money, the market recovers over the next year, you’re roughly even and last night’s fitful sleep is a distant memory.  If you do not return the money then it does not matter how well the market recovers, you will forever be down $20,000 and fitful sleep is now a new habit.  If you insist on arguing that the market will continue to free fall then your level of pessimism suggests perhaps you never should have been in the market from the start.

But as interesting a discussion as that is, it is beside our targeted point.  Assuming you have restored your market position or never removed funds in the first place, are you still sitting in a strong cash position?

If yes, you have 3 options depending again on your responses to the other legs of this stool.  You can elect to pay off debt, put the money in the market in anticipation of it growing, or continue to hold the cash.  I am personally given to action and advise first debt and then market… unless our third item presents a stumbling stone.

If you find yourself in a cash-poor position there is no discussion of options, you simply need to start the accumulation process and fold it accordingly into steps 1 and 3.

How’s the job?

Is your job safe?  After over 12 years mine was not so I know the feeling.  I understand that this is a scary question to consider and that the answers are typically layered.  My recommendation is to remove yourself from the equation and as objectively as possible consider your employer, industry, and community.  If your job is safe then move forward with the plot lines resulting from items 1 and 2.  If you remain uncertain, get an outside opinion and err on the side of ratcheting up your emergency fund to something more in line with the 6 month target.  If you’re an auto worker in Detroit or you otherwise know your job may be on the line, then horde all the cash you can find and polish up the ole resume.  Debt reduction and investing can be done once the income source is stabilized.

So by now you have an appreciation for the depth of interrelation in these questions, as well as, the interdependency of their answers.  Assessing your readiness for the recession to end – which in reality is little more than a real-time metaphor for achieving your financial freedom – is like giving driving directions.  Due north remains due north, whether that is a right or left turn is situation-ally dependent.

But all the same, the best answers are always the easiest to predict.  Debt is bad.  Cash is good.  And a stable job is always a winning bet.  If you have these points down, you are well on your way to being ready.

Be sure to check out Do You Dave Ramsey? for more of Dave’s articles. Thanks, Dave!

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February 25, 2009 at 5:05 am

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