Nickeled and Dimed

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In Cleveland, Ohio, 133 homes sold for $1 in 2008.  In Detroit, Michigan banks have resorted to paying investors to take foreclosed houses off their hands.  Combine that with interest rates being five percent or lower and the $8,000 homebuyers credit and there has never been a better time to purchase a home.

The deals don’t end with real estate.  The auto industry is also being forced to offer incredible deals in an attempt to move inventory.  Toyota is offering zero percent financing on 11 different models. Hyundai is offering to make your payments for three months if you lose your job.  No matter where you look, you will find good deals right now.  Restaurants, grocery stores, air lines, hotels, amusement parks, sporting events and nearly anything else you can think of are all offering incredible specials right now in an attempt to keep sales up during the recession.

But if all these great deals are out there, why are people still not buying?  Because very few people were financially prepared to take advantage of the recession forced yard sale.  Instead, they are finally getting around to paying off their debt and building emergency funds.  It’s great that our savings rates are finally rising, but had we had our finances in order before the crisis we would be able to take advantage of one of the biggest buyers markets of all time.

Here are a few ways we can make sure we are prepared to take advantage of the next economic downturn:

Pay off debt

Debt is never good, but it is an even bigger killer during a recession.  Not only does it suck up cash flow that could be used to take advantage of the great deals, it also puts you at risk of having your credit lines decreased or taken away all together.

Being free of all consumer debt during a recession will both limit your risk of being effected by it and increase your chances of profiting from it.

Build as big of an emergency fund as possible

While most personal finance experts will tell you a three to six month emergency fund is adequate, if you want to be in a position to take advantage during a recession you should aim higher.  Most people run a much greater risk of losing their jobs during economic downturns and will likely take much longer to find a new job if they are laid off.  Thus, a larger than normal emergency fund will be needed to protect you from extended unemployment.

By saving a year or longer emergency fund you can protect yourself from job loss and put yourself in a position to spend money guilt free.

Raise your FICO score

During recessions banks and other lending institutions become much more stingier with their money.  Instead of lending money to anyone who walks through the door, only the most credit worthy applicants are approved for loans.  Your FICO score will almost single handedly determine your credit worthiness.

Your FICO score will determine whether or not you get to participate in the next yard sale.  Improve yours and protect it at all costs.

Make yourself indespensible at work

Job loss, or the threat of job loss, is the biggest reason for not spending money during a recession.  Make yourself indespensible at your job and you will remove this barrier.  Whether it is switching jobs to a recession proof field (healthcare, etc.) or simply increasing your importance at your current job, you have the ability to significantly decrease your chances of losing your job during recessions.

If you are secure in your job you are free to spend more money during an economic downturn.

For most of us, survival is our goal during this financial crisis.  Just being able to put food on the table is the top concern for many.  But by preparing our finances before the bad times hit, recessions can be used to boost our lives instead of inconveniencing them.

Survive this recession.  Use the strategies above to prosper during the next one.

Please continue sending me any personal finance related questions, suggestions and story tips to josh@nickeledanddimed.com.