Personal finance is part of our life. This is why one of the greatest way to learn personal finance is by observing how others manage their money.  It has been a habit of mine to study and observe how others think about their money and how they manage the money. It is always great to learn from others experience.

Lately, more and more news about global economy crisis has been coming out and saying that we are in a big economy crisis that we never had  before. Finally, United States was finally declared in recession and it already started since last December 2007. In fact, every country in the world is having recession problem too.

It is a common sense that we should keep more cash on hands at this tough time. This is because cash is the king in down economy. But it seems like not everybody can understand the condition.

Last week, I found that one of my friend just bought a new car. This really makes me shock! No, she doesn’t really need this car because she already has 1 for her family. Furthermore, there are only 4 members in her family and her 2 children are below 12 years old. So 1 car is just enough for her whole family. But somehow she still buy the new car.

For the past 2 years, her income has been increasing persistently. She is running a book keeping small business which can generate some steady incomes for her. But I also can see that she has been buying a lot of things in the past 2 years. She is just like the typical people, make more money and buy more liabilities.

On the other hands, she has credit card debt and she has a bad credit because of it. She almost bankrupt due to these debts before. But she never learn the lesson as I can feel that she never thinks or plans to pay them off and increase her credit score. If you read my post about credit score, you will know that how important credit score is in our financial planning and on the road to getting wealthier.Therefore, we must control our credit score and keep it high.

If I was her, I would have maintain the same lifestyle and keep all the extra money generated from business properly. I will concentrate on 2 things. First, I will use that money to setup an emergency fund. Once I hit this goal, then I will concentrate on paying off the debt and increase my credit score. Once my credit score is increased, I can talk to the bank and consolidate the debt to a lower interest rate loan. This is the common steps in personal finance. But my friend still cannot follow it even though she is good in accounting.

So do you think that people will change their spending habit? Will people become smarter in personal finance because of this financial disaster? I really doubt on this.

Every day, you hear a lot of news from media around the nation about recession. You have found that your colleagues, neighbors, friends and people around you are worried about recession.

Recession is really a word that can make people worry. However, if you are doing well in your personal finance, you won’t worry that much about this. In fact, recession also has its own benefits.

Let me show you the benefits:

1.    Recession makes people frugal. One of the reasons people worry about recession is because their personal finance is not strong enough to fight with recession. The good news is worry can make people change. Many people will learn the lesson and be more frugal.

2.    Recession helps people think about their finances. I hope that people can learn their lesson from a recession. If you are worried about recession, this is because your personal finance is not recession-proof enough. So you have to sit down and think properly what you should do to manage your money in a better way. At least you can prepare for the recession in future.

3.    Low Interest Rate. In order to help the market, Federal Reserve has already cut down the interest rate several times. If you read my article Federal Reserve Interest Rate Cut and Your Personal Finance, you will know its effect on your money. At least, credit card and mortgage interest rates will drop and this is good news for a lot of people.

4.    Inexpensive Stocks. For some investors, recession can be good news for them. Stock market drops badly during recession period. So investors will jump into the market and buy those low cost stocks. When the economy goes back to normal, the stock price will raise and they make money from this. This is a cycle of generating wealth.

5.    Great Deals on the market. Just like stock market, many things in the market will be affected and drop in price. So if you are well prepared financially and have plenty of cash, you can get a lot of great deals on the market. Currently housing market is dropping. You can pay attention on it and you might find 1 or 2 good deals for your real estate portfolio. 

6.    Win your business competitors. I don’t really wish to say this but this is the time you can beat your business competitors and stand out the crowd. Many businesses are slow or even closed down during recession. So if you can do something to boost and maintain your business, you will win your competitors and stand out in the market.

Recession can be good or bad

Like most of the things in this world, recession can be good or bad. In fact, I heard before that recession or bad economy period is a time of wealth exchange. Some people will be poorer but some people are getting richer. This is all about your financial literacy and how well you prepare your finance for this tough time.

We don’t know whether recession really hit the nation. It is professional economists’ job to research and analysis whether we are really in recession right now. In fact this is not really important for us. The most important thing right now is we should take action to recession-proof our finance and prepare for the recession.

Just like our body. It is more important that we protect and keep our body healthy. Once we make it, our body will hardly get sick. In most cases, prevention is the best. 

So let’s take some simple steps to prevent ourselves from suffering financially during recession.

11 Steps to Prepare for Recession

For Your Personal Finance:

1.      Keep and Save an Emergency Fund. Emergency fund is the most basic requirement that you must do in order to proof your finance against any financial disasters. It is recommended that you save at least 6 months of your living expenses as your emergency fund. However, if you are tight in budget, you should at least reserve 1-3 months of emergency fund for recession. The more you save, the more security you have during recession period.

2.      Spend Wisely. Start a budget and spend your money wisely. Try to live below your income and not your credit. If recession really happens, you will need to tighten up your budget so that you have more money each month to pass the hard time.

3.      Reduce Your Debt. I always recommend people around me to reduce their debt as much as possible especially credit card. Debt is just like a bomb and it can burst anytime and ruin your life. It is ok if you are having a job or income to support it. However, it will be a nightmare for you if you are downsizing or in the recession period. So reduce it and make it under your control.

4.      Keep an Eye on Your Investments. If you are investor, you may want to put at least some of the nest egg in a safer place. Recession usually hurts stock market. Nowadays, real estate market is not really stable as it is one of the causes of recession. So maybe you should retreat your money from those 2 investments options. Bonds usually do better in recession and it might be a good choice for you.

Recession is a normal economic cycle that happens from time to time. In my article, Understand Recession in Simple Language, I said that the main reason that caused recession is the fear of people. Once something happens on the market and makes people worry about their financial future, they will stop spending money and hence activate the economic chain effects until recession happens.

What has actually happened that make people worry?

This is the issue that we are going to discuss below…

Reasons that caused the great American Slow Down

You will see and hear the phrase recession a lot from the newspaper or other broadcasting media in America. This is because there are a few economists predicted or even claimed that America is already in recession. This has been a hotly debated issue among the economists for months.   

Recession is a word that makes a lot of people worry, isn’t it? However, no one can really say that America is in recession, so are we. In fact, we should not care about how others have said about it. We should learn how we can “see” it through our own eye and analysis. Then we should learn how to survive financially in the recession period. Recession-proof on our personal finance is the most important job that we must do right now, no matter recession happens or not. But before we do so, we must understand some basic about recession.

What is Recession?

Recession is a period when nation’s economy is slowing down. Conventionally, we only can declare we are in recession if the slowdown has continued up to 6 months. It is just a normal business cycle and natural phenomena in economy. Every thing that hits the highest point must go down before it can hit the new level. If you read the stock market chart, you will understand this theory very well.