So...recession. That's bad, right?
September 15, 2008 5:02 AM   Subscribe

I get that the economy is bad in general. But I'm trying to figure out how this is all going to affect me specifically.

Because of some misfortune 6 years ago (my income completely TANKED in 2002, and I had to take a few cash advances on my credit card to make expenses), I have been operating under total tunnel vision economically since then, ignoring what was happening in the rest of the world and trying to get my own house in order. Now that I think I've just managed to do that, finally, comes the news of Bear Stearns and Lehman and Fannie Mae and Freddie Mac. I also am not too well educated on how the economy works on a detailed level; I do know generally the positive and negative trends, I just don't know how to translate them into a practical hands-on, how-does-this-affect-me kind of reality. So can someone explain how someone in my case could potentially be affected by this?

The stats:

* I rent, and I have no intention of even THINKING about buying anything until my credit card bills are knocked down, and that won't be for another 3 years. I also went for the 2-year lease when it renewed, so my rent will stay the same until 2010.

* I somehow kept up all my bills even when things were bad, and as a result I have AMAZINGLY good credit.

* I just applied for and received a super-low-rate credit card -- and my research confirms that the rate will actually not ever rise -- which I am using solely to transfer a balance from a higher-rate card. I rarely if ever use my credit cards for actual purchasing, I'm just paying down balances. I pay a little more than the minimum each month.

* I have a modest IRA and a modest 401-K plan. I have no intention whatsoever of touching either one for at least 36 years.
I also have a very, very modest savings plan -- a bit put in each month, but after a year that becomes my IRA contribution.

* I have pretty conservative spending habits, and they just got even more conservative when I started brown-bagging my lunch at work (but that was for health reasons; I'm taking the financial savings as a fringe benefit). I rarely eat out, I see maybe one movie a month in theaters IF that, I take a DIY approach to a lot of things.

* I usually get a decent couple-hunderd refund on my taxes each year; I haven't owed anything on my tax returns since about 2005.

* I don't own a car and rarely drive. As for home heating - those costs in this apartment are generally pretty low (got into the "leave the thermostat turned down and put on a sweater" habit early). So the oil costs aren't affecting me too much either. (Yes, I do know how gas figures into the cost of products coming to stores, though.)

I've tried asking a friend about this kind of thing before, and pretty much all he said that I would go through is that my taxes would go up a little and prices of things would also go up. Which doesn't sound that bad, actually (I'm used to living frugally as it is already). Can anyone else give insight into how else the economy might affect me specifically?
posted by EmpressCallipygos to Work & Money (11 answers total) 3 users marked this as a favorite
The biggest thing I can see is that you might lose your job. I don't know who you work for or even what industry you're in, but a cascade of bank failures is likely to produce hard times for businesses. Even those who aren't immediately affected by lost assets--and there are plenty that won't be--may find themselves on hard times as the easy credit to which businesses have become accustomed dries up. Some may actually run into liquidity problems themselves as a result.

You also might see your IRA or 401k take a hit, as those tend to be invested in various capital markets, but as it doesn't sound like you're on the verge of retiring, that should have much of an immediate effect.

Other than that, you don't seem to be positioned in such a way that a major economic crisis will affect you directly, because your income isn't significantly asset-dependent, and you don't appear to have significant reserves in the types of securities which are most likely to be affected by today's bloodbath.

I would suggest adjusting your withholdings on your W-4 though. Tax refunds are a bad idea, as you're essentially loaning the government money for free. Yes, some people view this as a kind of enforced-savings program, but there are much better ways of doing this. If nothing else, you can set up an automatic transfer into a money-market or savings account from your checking.
posted by valkyryn at 5:11 AM on September 15, 2008

I would be concerned about inflation and rising costs. That, and as pointed out above, your job are the only two things to worry about outside of the doomsday scenerio where you need to get a gun and protect yourself from the masses who need food and water and will steal or kill to get it.
posted by JohnnyGunn at 5:46 AM on September 15, 2008

I usually get a decent couple-hunderd refund on my taxes each year; I haven't owed anything on my tax returns since about 2005.

A minor thing, for sure, but I'd be looking to fix this if possible. Getting a tax return feels warm and fuzzy, but all it really means is that you gave the government an interest free loan. The goal should always be to break even or owe a very little bit (then you are the one getting the interest free "loan").

I'd look to keep enough money in savings or easily-cashed-out investments to pay all of your necessary expenses (rent, CC payments, utilities, food, etc) for six to nine months. That should see you through most jobless streaks that you might encounter per valkyryn's comment.

I would also drop every unnecessary expense (cable TV, for example) until the credit card balance is, at the very least, completely off of the high-interest card. Especially if any of them are still charging you cash-advance rates.

Other than that... it sounds like you're actually doing pretty well for yourself from where I'm sitting.
posted by toomuchpete at 6:25 AM on September 15, 2008

Indeed. Last night I told my wife that if gangs of thugs roam the streets, I'm not sure how well we'll do.

Otherwise, my strategy is like it always is, just with more focus: pay debt off first. don't go into more debt. be frugal. work hard. fingers crossed.

Market opens in 5 minutes. If it goes down 1500 points at the open, I may have to start refining my gang of thugs strategy a little more.
posted by jragon at 6:26 AM on September 15, 2008

Thanks -- so far you've both confirmed what I'd guessed was the case, that I may not be affected too severely; that just didn't sound right for some reason.

I'm not too worried about the job. I do work in a bank, but as a temp -- and I've been here as a "temp" for four years now. (I did the math a year ago to find out what would change if they hired me outright, and all that would happen is I'd get two extra days of paid vacation time and that's it. So, whatever.) The department I'm in has had some layoffs, but only one or two, and the department as a whole has been one of the more stable ones at this bank. Even if I do get asked to leave, my skill set is high enough that I should pick up another temp gig pretty quickly (I've even added another skill set since starting here that I haven't had a chance to use).

I also am VERY slowly starting to do freelance writing as a sideline source of income; I already get about $500 annually from that. Which is why I don't want to touch the tax situation just yet, as I'm sure I'll have to report that if things pick up, and if what I'd pay reporting that income would be offset by the refund from the "day job," then I'd break even on tax day and that's just as well. ....Uh, right?

In other words -- great info so far, I'd love to hear more.
posted by EmpressCallipygos at 6:34 AM on September 15, 2008

Oh, and to toomuchpete:

I would also drop every unnecessary expense (cable TV, for example) until the credit card balance is, at the very least, completely off of the high-interest card. Especially if any of them are still charging you cash-advance rates.

Oh, the entire balance of the high-rate card is being transferred to the super-low-rate card within a week, when they send me the statement and I can write the transfer check for the full damn amount. (Which I will greatly enjoy, and I will also probably flip off the bill when I do so just for spite.) that's the whole reason I got that super-low-rate card.

I'm also going to transfer some of the balance from the medium-rate card as well. I really found a good situation there.
posted by EmpressCallipygos at 6:38 AM on September 15, 2008

From your description, it sounds like you don't have very much short/medium term savings or investments, you're in debt, and you have a sensible budget. Obviously it would be great if you were debt-free and had a lot saved, but really your situation is pretty average compared to most people right now.

As valkyryn said, your main vulnerability is your income. Always prepare for the worst, which in your case would mean being unemployed for an extended period of time. You need to make sure that you have enough money saved in an emergency fund to protect yourself from having to go into debt again. Regardless of the economy, though, everyone should have several months worth of expenses saved just in case.

That's pretty much it though. You don't own a house so you aren't directly affected by falling home prices, and you don't have big investments or savings so you aren't affected much by inflation or stock market losses. In fact, when you're in debt, inflation is actually good because (assuming your income rises in line with inflation) your debt gets smaller and smaller relative to your income. You are saving for retirement long term, which is good, and current economic conditions probably won't have much effect on your long term earnings.

Overall, just your best option is just to pay down your debt as quickly as possible and avoid spending too much, which you are already doing. The economy is very complicated and hard to understand, but managing your personal finances is just a matter of doing a few simple things regardless of whether or not there's a recession.
posted by burnmp3s at 6:44 AM on September 15, 2008

You say that you are a temp. Does your temp agency provide health insurance benefits? If not, I'd approach the bank about being brought on permanently in order to get that benefit as well as some job security in a crisis time. If they decline, I'd start looking for another job that provides benefits. You're doing pretty well for yourself right now in terms of building a reasonable life, but you have no safety net or job stability, and an illness or disability, even if you qualify for government benefits, will wipe you out.
posted by decathecting at 7:54 AM on September 15, 2008

You say that you are a temp. Does your temp agency provide health insurance benefits?

Yep; it's a PPO plan, and is actually pretty decent. There's dental coverage as well. I'm generally healthy as well -- no pre-existing conditions, I get regular checkups, I eat well and get exercise, I don't smoke, no family history of anything major. The biggest chronic health problem is a wonky back that I deal with with preventative care (i.e., I don't lift anything overly heavy and I exercise to strengthen it) and occasional alternative relief (a friend's girlfriend is a massage therapist who offers friends a discount, and she took care of me the last time it went out).

You're right that that could change if I got hit by a jeep or something, though; the building-the-savings is definitely part of the strategy. But I do have health insurance, which I also understand puts me in a good place. (The 401-K plan is also through the agency, in fact.)
posted by EmpressCallipygos at 8:54 AM on September 15, 2008

Other than indirectly working for a bank, it doesn't sound like you're in danger of taking a direct hit from the Wall Street mess. I'd get the emergency savings (three to six months of living expenses depending on what book you read) fund built up if you don't have it - that's a financial shock absorber that could mean the difference between a stressful (but ultimately not very damaging) stretch of unemployment, or a devastating event that knocks you back years financially.
posted by Calloused_Foot at 12:20 PM on September 15, 2008

Note: I am not your economist. That said, other than the credit card debt and barring a disaster (you're hit by a jeep or laid off) you're probably in reasonably good position to weather the economic climate.

You rent your living space, which is fine. Now is a fantastic time to buy a house for people who have good credit, but it's not so bad for renters, either; as more people upgrade out of apartments and into the now-much-cheaper-houses, demand for rental units decreases and you rent could potentially go down (or at least not increase).

You have a great credit score, which is phenomenal. You're a rare breed these days, and folks who have money to lend right now will be looking to lend it to someone much like you.

I don't know the rates on your current debt, but you might be able to find a lower-rate or installment loan into which you could roll that debt from someone other than your credit card company. It goes without saying that you should avoid using the cards irresponsibly until you get your debt paid off and that you should pay as much of that debt down as you possibly can as quickly as you can. Oh, and NEVER, EVER USE A CASH ADVANCE FROM YOUR CREDIT CARD AGAIN!!! I'm sure you had good reason, but it's almost always a bad solution for someone with good credit.

Your retirement accounts should be fine. You've got plenty of time for them to rebound. I wouldn't worry about it. You might just be sure that you're sufficiently diversified.

You're being responsible with your spending, so congratulations and keep up the good work. Try to put those brown-bag savings into paying down your debt.

If you have a predictable income, you should take a little time with the paperwork to figure out exactly how much you will owe the government and how to pay them as close to exactly that amount as possible. You're not going to make a lot of interest on the $200 you're loaning Uncle Sam every year, but there's no sense in not using that money to pay your debt down faster.

Gas prices, general inflation, and the weak dollar are going to be a rough cocktail for consumer prices. Almost everything is going to get more expensive. But, there's not really much you can do to protect yourself from that, so there's not any reason to panic. Just be cognizant of prices and try to substitute away from the things that are inflating the fastest.

Overall, I think you're doing a fine job already and you're general financial situation is such that you will probably be less affected by the current downturn than almost any other group of people. Good luck, and watch out for jeeps!
posted by UrbanEconomist at 8:05 AM on September 17, 2008

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