Tuesday, November 18, 2008

Getting Ready for a Depression

I read an interesting article in the Washington Post last month by Paul Farhi that claimed that the Great Depression did not happen in the instantaneous manner we’ve always been told. That the stock market actually improved after the crash and―a long-cherished image―stock brokers did not leap out of windows en masse. The scary part is that a couple of years down the line, the country did sink into a mess of 25% unemployment.

Someone I know is about to lose his job. (Citicorp has just announced it is laying off 50,000+ people.) He has a nonworking wife whose own career never got started because they had two children, both of whom are still very young. If he can find a new job at a comparable salary, nothing has to change. If he can’t, but his wife can finally start the career for which she trained, some things will change but life should be all right. But what if neither of them can find a job that replaces his current salary? Or what if it takes a year or even two years before that job is found? Or what if they both have to work because each has to accept a very low salary? Everything about their life will have to change. The kids will have to go into daycare. The family might lose their house before they get enough replacement income. They might have to move to an area where there are more opportunities for both of them. Or where a relative can perform free child care. And more.

Thus job loss per se isn’t the only situation we have to fear in the coming months and years of finally-admitted recession and possible depression. Taking a big hit financially and changes in our living arrangements are very likely, too. The better we prepare ourselves for those possibilities, the easier it will be to accept necessary changes.

What we all need right now is an emergency game plan, one that is flexible enough to accommodate several possible situations. The plan should be based on the amount of living expenses we have in savings. Sure, Citicorp will probably pay severance. But some companies that have filed for bankruptcy have not, so be cautious about counting on severance as a significant part of your carrying costs before finding a new job. And unemployment compensation almost never pays enough to replace a good income.

The emergency game plan should be a timetable keyed the to the amount of our rainy day savings. In the past, personal finance experts urged us to keep three to six months of living expenses in savings. Suze Orman is now telling people to have eight months or more in savings. She’s a smart woman. She’s assuming it will take longer than before to find another job. Let’s say for argument’s sake that we have eight months of expenses in savings. And it takes a year to find a new job. We’d be in big trouble.

The plan should be based on the money we have, not on our hopes for regaining income. The timing of our actions also has to be based on the money we have or can access, perhaps by cutting expenses, but also by adding a night job, or getting another family member back to work, or by selling big items such as a second car or a tricked out racing bike.

Here’s a sample game plan based on having eight months of living expenses in rainy day savings:

• Month One: Job loss, followed by immediate efforts to obtain a similar level of employment with no change in location. Cut down on daily expenses. Postpone all big ticket expenses.
• Month Two: Drastic permanent cuts in family plans for vacations, presents, large future expenses such as private schools. Explore local housing market and consider selling current house. Month Three: Widen the job search to other states and other kinds of work locally. Check out housing costs and lifestyle indicators in other states, and lower-cost housing locally. Find a real estate agent.
• Month four: Weigh alternatives of lower salary locally coupled with local move, or relocating to another state. Sell and donate excess possessions. Ready home for sale.
• Month five: Hold yard sales to eliminate all excess possessions and empty any storage. Put house up for sale.
• Month six: Hold open houses. Find a potential new home and interview movers.
• Month seven: Pack. Lower price of house by 15%.
• Month eight: Start new job. Close on house and move.

Sounds draconian, doesn’t it? But this plan assumes some key positives, such as that you will find a job by the time your money runs out, and that it will only take you three to four months to sell your home. It also assumes you’re selling in the high season for home sales, which may not be your situation. And you’re only lowering your price by 15% after 90 days, which in some markets may not be enough to get the house sold.

Is the only answer to unemployment to pack up and leave? No. We could add into the timetable:

• Month One: Sign up for courses geared to give you additional expertise or qualify you for a new career path. Register for state unemployment assistance in resume writing, network, interviewing, and more.
• Month Two: Network with classmates and professors to enhance employment leads.
• Month Three: Rearrange family living patterns to allow a nonworking spouse to work, or a teenager to get a part-time job or a scholarship.
• Month Four: Join local associations related to your field of expertise and arrange to be a speaker before the group. Teach adult education classes in your field of expertise. Network.
• Month Five: Rent out a room. If it won’t lower unemployment compensation benefits, get a bridge job as a night watchman, weekend pizza deliverer, store stocker, etc.
• Month Six: Sell excess possessions on eBay. Volunteer, and network as you do.
• Month Seven: Sell the second car. Take and teach more courses, and repeat all the networking steps.
• Month Eight: Start new job. Re-start rainy day savings.

Some people would also recommend cracking open a 401(k) in a desperate measure to keep funding your pre-unemployment life, but your retirement savings should remain untouched. You’re going to need every penny of your retirement savings later in life, when you’re likely to be even more desperate than you are today. Unless you have good reason to believe that you will be hired within a few months (for instance, when a new fiscal year budget opens up some jobs), there usually is little point in emptying your pockets only to delay the inevitable. If you’re not going to find another good job, or one in this area, and you can’t get another family member to pick up enough of your lost income, and you can’t create some other income-producing scenario such as renting a room or selling your garage full of classic cars one at a time, you should seriously consider downsizing your life.

Do you see how the longer you remain unemployed, the more you have to change your life? If you can find a new job in three months, you won’t have to sell your house or ask your spouse to work. If it takes you six months to find a job, maybe the income hit you have already taken makes selling your house and moving locally the smart thing to do. If it takes a year to find a new job, maybe you have already maxed out your credit cards paying day-to-day expenses, and your house is in danger of foreclosure, and you have to move hundreds of miles to take the only job you got offered. But what is the alternative? Santa Claus isn’t delivering great new employment opportunities in his sleigh, and winning the lottery isn’t happening, so you will have to take action.

Recognize which way the wind is blowing. If your area of employment has taken a big hit locally and there are thousands of people with your skills suddenly out of work, it may be sensible to plan moving to an area where there is less competition. You can find this out by asking job interviewers how many applications they received. If they received thousands, you know you’re up against it. Still, you got the interview, so maybe you will win out. I’m not advocating giving up hope. But I want you to have a plan.

1 comment:

Hopeful Lily said...

Here's the link for that Washington Post article. I put it in the text, but it didn't come through: