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Ben Stein Offers Four Lessons From the Recession

by Flexo on November 20, 2009

in Investing

The United States must be approaching the end of the recession when economists begin offering their retrospectives. Even if the data are pointing to an end to the recession, in technical terms, the economy is a long way from recovery. Just look around at the people out of work. Even those who have maintained their jobs are finding it difficult to qualify for mortgages, keeping the real estate industry itching for more handouts like the extension to the home buyers’ tax credit.

And some economists are not convinced that the worst is over. We may be in the lull of a double-dip recession. Wherever the economy is, making predictions, like critiquing wine, is often no more accurate than randomness.

For Fortune Magazine, economist and actor Ben Stein contributed four of the lessons he learned during the recession.

  • Economic forecasting is still an extremely difficult gambit
  • Financial market forecasting is even more troublesome
  • The amount of lying and deception by the financial sector of this country has been breathtaking
  • The government has no special abilities to forecast or predict a darned thing

Ben Stein is usually a strong supporter of the financial industry, so it’s nice to see him pointing out some of the flaws inherent in the system. He goes on to reassure investors that staying invested in stocks and bonds while keeping enough liquidity is the best way to weather recessions in the long term. If the second dip rears its head, I would like to believe it will provide more opportunities for investing for growth over the coming decades.

Are you prepared for the next recession?

Photo credit: simonhn
4 lessons from the recession, Ben Stein, Fortune, November 19, 2009

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New Graduates Facing Unemployment May Never Reach Income Potential

by Flexo on October 19, 2009

in Career and Work

The unemployment rate for young workers between the ages of 16 and 23 is 18%, and that is an increase of five points from a year ago. That age group includes high school drop-outs as well as college graduates, and for these people the future looks bleak. Adults are taking the minimum-wage jobs teenagers might be offered in other economic situations. Older workers, otherwise approaching retirement, are not leaving the workforce as quickly. The openings for younger workers aren’t there.

The bad news is starting your career in a recession is one of the worst things you can do for your long-term financial security. More bad news is that there is little any one person can do about the economy at large. Here are the numbers, from a study at Yale quoted in the cover story in today’s BusinessWeek:

For each percentage-point rise in the unemployment rate, those who graduated during the recession earned 6% to 7% less in their first year of employment than their more fortunate counterparts. Even 15 years out of school, the recession graduates earned 2.5% less than those who began working in more prosperous times.

Young adults might be destined to be a “lost generation.” Here are some suggestions for 16-to-23-year-olds who find themselves having a difficult time starting their career in this recession and want to mitigate its effects on long-term income.

1. Finish your education

It’s an issue of supply and demand. First, if you have not done so, completing your Bachelor’s degree will have two important effects. First, it will improve your marketability among entry-level employees when fewer open positions will create a competitiveness that ensures that the best qualified candidates will win. A Bachelor’s degree is a gateway to at least the middle class, and that’s going to be more important than ever.

Second, finishing college now will keep you out of the worst of the recession. This will allow you to stay out of the worst fight for jobs, but it has some drawbacks. Delaying the start of full-time income can also have detrimental effects on your long-term income — but if you wouldn’t be working anyway, this isn’t much of a disadvantage. Also, if you are relying on student loans, you will be amassing more debt that will require payoff down the road, perhaps shacking you to a job or career that is not best for you. New student loans have higher interest rates than they have in the past, adding to the pain of debt.

If you have your Bachelor’s degree, consider spending a few years to earn your Master’s or Doctorate degree. Are you worried about being overqualified? Don’t be. As we’re seeing in the recession where many workers are competing for few jobs, anything that helps you stand above the rest will be an advantage rather than a disadvantage. You might want to consider adapting your desired career to one better suited for an advanced degree, however.

2. Become an apprentice

In general, apprentices earn more throughout their careers than those who don’t hone their skills in a formal training program. Traditionally, apprenticeships are common for certain crafts and trades. Electricians, plumbers, and carpenters often get their starts through apprenticeship and there is significant income potential in these fields.

One creative answer is to become an apprentice for a career that does not traditionally fit this profile. For example, if you have musical talent and would normally consider performing or teaching in a better economy, consider composing music for films or television. You can contact a professional currently in the field and contact them about becoming an apprentice. One key to successfully finding an apprenticeship is the willingness and the ability to work for free.

3. Start your own business

I’m not talking about selling your possessions on eBay, but padding your savings account with cash rather than padding your home with useless objects is never a bad idea. Everyone has at least one marketable skill. It may require some time brainstorming to determine exactly how you can turn your skills into a service you can offer people or other businesses.

A recession is perfect timing to start a business, particularly if you can dedicate all your time to making it work (that is, you are otherwise unemployed). Many new businesses suffer because the owner needs to devote his or her time to the day job, a spouse, and perhaps even children. For young workers, the time will likely never be better for starting a business with the ability of giving it your full attention.

4. Save money

As a recent graduate or drop-out, you may have the option to move back in with your parents for a short time. After all, there is a recession and being able to save money on rent or a house payment is worth the temporary shame you might feel for going home with your tail between your legs. This is most likely the biggest opportunity for savings, but you don’t want to take advantage of the situation. Show your parents that you’re working hard to make the recession work for you, and they’re more likely to give you a break. And don’t forget to express gratitude.

Consider frugality as a way of life. In an economy where you have less control over your income thanks to fewer employment options, you can still control your expenses to a point. Take the extra time to determine what you are willing to cut back in order to help your money go farther. Occasionally, generic brands and store brands are good compromises.

Creativity leads to success

Surviving in a recession where it’s difficult to find a job relies on creative thinking. Use the opportunity to rethink your career path. If the acquisition of money has been your ultimate goal, realize that money by itself is not a goal. You may use the opportunity to break into a less popular field with a lower income potential but with a greater satisfaction potential.

Accept that the odds are against you if you want to compare yourself and your bank account against people who began their careers in the height of the economy, people who, on average, will out-earn those entering the workforce right now.

Photo credits: CarbonNYC, roland
The Lost Generation, Peter Coy, BusinessWeek, October 8, 2009

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Tracking the Economy By Looking at Underwear

by Flexo on May 27, 2009

in Consumer, Economy, Frugality

According to Alan Greenspan, this is of the first types of spending that consumers give up when a recession is felt personally. When men come to the point at which they need to save more money than usual and decide to cut bank their spending, underwear is at the top of the list of possible reductions. Because underwear is invisible to the public, man apparently have no shame in letting the fabric deteriorate more than they would when a flush bank account would allow them to replace tattered undergarments when necessary.

Furthermore, an increase in underwear purchases could signal the beginning of a recovery. If this is true, it’s bad news for the economy in the next few years. Underwear industry experts are predicting no growth in sales until 2013.

I have not noticed any decline in my own undergarment purchases. My overall spending on clothing has remained strong as I have been replacing some of the clothing I’ve owned for ten years or more, some of which no longer fits anyway. My underwear doesn’t necessarily last as long before I replace the old clothing with something new.

Tracking the economy by looking at underwear

Purchases of women’s underwear does not correlate to the recession. Any time is a good time for buying lingerie.

Have you reduced your clothing purchases, particularly underwear, to save money this past year?

If you can’t answer this question because you don’t know how much you spend on clothing, consider tracking your expenses for a period of time. You might find you have some opportunities to save money across your entire budget.

How your undies track the recession, Michael Brush, MSN Money, May 27, 2009
Photo credit: williamnyk

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When Large Institutions Hoard Cash, Start Investing

by Flexo on April 28, 2009

in Investing

Rather than lending and investing, banks are holding onto large amounts of cash. For large companies, particularly companies whose stocks trade publicly, now is a good time to keep cash on hand for excess liquidity and to look strong for investors and analysts. The liquidity allows the bank to be ready to strike when they believe it’s time to invest their own assets. And they will invest, it’s only a matter of time.

Even though I usually stay away from predicting shorter-term stock market performance, I can safely say that when large financial institutions begin lending and investing en masse, the stock market will go up. So now, before the banks make their moves, it might be a good time to move some of your excess cash into equities. The economic environment right now, in the midst of a recession, might eventually prove to be a once-in-a-generation opportunity for investing once we are far enough away to view the longer-term trends and place day-to-day experiences in perspective.

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Podcast 1: Recession Tips and Shrinking Your Bills

by Flexo on April 26, 2009

in Podcast

It’s finally here! Welcome to the first edition of the Consumerism Commentary Podcast. Today Tom and I discuss tips for surviving financially through an economic and personal recession. The feature, however, is Tom’s interview with Peter Pham, the CEO of price fighting service BillShrink.

 
To listen, use the player above (Adobe Flash required), download the podcast here, subscribe to the podcast RSS feed, or use the iTunes link.

[00:00] Introduction, surviving financially through a recession
[18:19] Interview with Peter Pham
[26:45] End

Members of the email newsletter might recognize the discussion with Tom and myself as an edited version of the interview shared in the exclusive “pilot episode” of the podcast.

If you have suggestions for the next edition of the Consumerism Commentary Podcast, or reactions to these interviews, feel free to leave a comment here or email your thoughts to podcast at this domain name.

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The Recession Finally Hits My House

by Smithee on April 3, 2009

in Career and Work

I work for a small Interactive Agency of twenty-four people. This is a company that managed to survive the dot-com bust and, like any company, has good times and bad times. Our president always makes every effort to keep great people, even if it means cutting her own salary. I consider myself lucky to have found a place there, not only because I love my work, but for the atmosphere and common sense of purpose.

Now, I consider myself even luckier. Yesterday, instead of twenty-four people, there were twenty-six. We simply don’t have enough work in process to keep going the way we were, so the management team had to find $60,000 a month to cut out of our operating costs. We had to let go of two project coordinators, ’cause we simply didn’t have enough to keep them busy.

Less drastic, but more personal, is the 10% salary cut that will affect everyone else for the foreseeable future. This will bring my before-tax salary of $80k to around $72k. I’m not going to complain about this. $72,000 a year is a lot of money, especially considering I don’t work under hazardous conditions, or with unruly children, and I don’t have to take steroids to stay competitive.

However, this will require my wife and I to tweak our budget somewhat. $72,000 is a huge salary for someone with no debts; unfortunately I am not that someone. It was that extra $8,000 that was enabling me to make so much progress toward finally erasing my credit card debt that began in 1997. As of today, the balance is down to $3,522. My first instinct for modifying the budget is to say, “Okay, let’s just ignore that credit card until things get better.” I know that’s not wise. The last finance charge on the card was about $37, and if I start making just the minimum payments each month, that number will just get bigger and bigger. It’s a complete waste of money.

But there are other considerations, too. My wife and I have things we want to do this year. In fact, we’ve already paid more than $1,000 to go to a conference in California, but we haven’t arranged any plane tickets or figured out where we’re going to stay for the vacation days when we’re not at the conference itself. And then there’s the pet sitter, the meals in nice restaurants, etc.

Or maybe this is the kick in the pants that I need in order to spend more time working on my freelance work. Given the different ways that a salary and freelance work are taxed, in order to make up the difference, I’d need to earn about $1,000 a month (putting half away for taxes the next April). I don’t imagine that’s going to happen anytime soon, but it does give me something to work toward. Flexo is always happy to have me write more for this site, and there’s a side business in Web Analytics that I’ve been flirting with. My two pro bono clients (I wanted to practice) have been thrilled with my work so far, so maybe it’s time I start courting paying clients.

As I said, I can’t really complain about my cut in salary. If it weren’t for the two car loans from 2006 and my history of dumb materialism, my wife and I would have quite a bit saved up. I have faith we’ll get to a point of having a three-month buffer, but it won’t be this year.

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Eight Tips for Living Through a Recession

by Flexo on March 27, 2009

in Saving

If you have been affected by the recession, perhaps by losing a source of income, you may not want to hear suggestions for turning a bad situation into an opportunity. In fact, the idea of turning challenges around for your own benefit is in line with the annoying soundbites that productivity gurus sell. But I firmly believe that it’s best not to let things happen around you without reacting and adjusting. Here are some ideas to keep you moving while the world is slowing down.

1. Reassess your finances. If your income has changed, you may find yourself increasing debt at a faster rate or worse. I suggest going back to the beginning by following the map set forth in Take Control of Your Finances. This involves reevaluating your goals, your income, your expenses, and organizing your savings and investments.

2. Consider your primary and secondary skills. If you are out of work, and particularly if you have experienced difficulty finding a new place of employment, it is easy to feel your skills are not appreciated. Perhaps this is a good opportunity think creatively about different ways to apply your skills or hone your other talents. In college, did you have a minor in a different area than your major? If you did, chances are you have marketable skills in some other activity. During my first two years of undergraduate studies, I had difficulty choosing my minor, switching from computer science to psychology. If necessary, I would enjoy pursuing either of these paths.

3. Turn your hobby into your own business. I have found that many people are reluctant to take the avocation they enjoy and turn it into a profitable endeavor. I can understand this; I work almost constantly these days between my day job and everything else I do. But if that day job were to disappear, there would be no question that I’d use this as an opportunity to ramp up my projects. I have already turned my hobby — blogging and building communities — into a business. Now my newer hobby is photography. I have tons to learn about this new hobby (and I still have tons to learn about personal finance), but if blogging were my “day job,” I might have take on photography as a more serious hobby, and possibly turn that into a business of its own.

4. Go back to school. Modern educational technology has made it convenient to earn another degree. You can take classes online in the comfort of your own home or you can go on campus and hang out with the young co-educational students. Do not focus on the return on investment (ROI) for the funds you put into additional education. Learning a new skill or studying an interesting topic has intrinsic value that can’t be measured by a financial analyst.

5. Consider frugality. I admit I’m not a big fan of most frugality tips out there. In the past, many frugal tips have required a lot of effort and therefore remained under the domain of people without other timely responsibilities. But online coupon websites and other modern technologies take a lot of work out of frugality, so this now is an option for more people. Frugality means different things to different people, so today’s recession provides an opportunity to explore and decide on where you can intelligently save money.

Check out this extensive list of frugal tips from Being Frugal.

6. Eliminate your credit card debt. Credit card interest is expensive. You don’t have to be frugal to realize that interest is in most cases an unnecessary expense if you spend less than you earn. If you’re out of a job, this can be difficult, particularly if you do not have enough income to cover the minimum payments. Call your credit card companies to see if they can assist you by lowering or forgoing your payments until your income returns. If not, perhaps they will lower your interest rate. It never hurts to ask, and ask a supervisor if the first customer service representative won’t provide satisfaction.

If you do have income, start the debt avalanche, the least expensive, quickest, and most efficient way to get out of debt.

7. Eliminate meat from your diet. I love a perfectly cooked, rare filet mignon. But meat, even steak from the grocery store, is expensive.

If you drop red meat, poultry and fish from your diet, you’ll find plant proteins cheaper than the equivalent amount of animal protein. The cheapest cuts of beef, such as ground round, average $3 per pound in U.S. cities (lean and extra lean); boneless chicken breasts cost $3.40 a pound; and canned tuna is about $2 per pound. Contrast that with dried beans and lentils at less than $1 a pound and rice well below $1 per pound… Even tofu, the chicken of the vegetarian world, is usually well under $2 a pound. Go Vegetarian to Save Money, MSN Money

Healthy diets help you save money later in life with fewer visits to the doctor.

8. Sell your extra stuff. The great thing about eBay is its enormous reach, bringing people from anywhere interested in owning anything closer together. There’s a market for practically anything transferable on the auction website. Sell your clothes, your furniture, your electronics, your art, your classic video games, and your baseball card collection gathering dust in the attic. Don’t expect to consistently make a lot of money selling your old items on eBay unless you own something truly rare. One drawback of the aforementioned reach is that lots of people are selling the same things you are.

But if you can create something original and use eBay to sell that product, you may be in a good position to earn a consistent income.

What would you add? How are you surviving this economic recession?

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3 Major Ways to Scrimp and Save in an Economic Recession

by Flexo on January 6, 2009

in Frugality

When the economy is growing and consumer confidence is high, it is common not to think twice about saving money and reducing expenses. If you are saving money every paycheck, investing in a 401(k) or other accounts for retirement, and spending less than you are earning there isn’t much motivation to reduce your expenses further.

I have experienced this first hand. As my personal economy improved through earning more money than I was accustomed to, I allowed my expenses to increase. For example, I moved into a more comfortable (and more expensive) apartment.

It’s hard to find a news story today that doesn’t comment on the current economic decline in the United States. Companies across all industries are not profiting. Many are declaring bankruptcy or laying off employees. With unemployment rising and the country in recession, there is less available spending money in the hands of consumers. Less spending leads to lower profitability again, and the cycle is complete.

Those who have lost jobs in this economy have found it tough to find new jobs at their old salary levels, and many have not found new jobs at all. I would hope that while the economy was prosperous, many families worked to form an emergency fund, but I recognize that many other families did not. For some, the loss of income will thrust a family into an emergency mode in which debt will escalate or savings will be depleted.

In this emergency mode, families and individuals should consider some tactics which may have seemed unnecessary, and in some people’s opinions, cheap, during happier economic times. Reality strikes hard, and desperate circumstances call for desperate measures.

Here are some tips for scrimping and saving through a recession.

1. Keep track of your spending. There is little you can do to cut back your spending if you are not sure how much money is going out the door. When you know that you’re spending less than you earn, you may feel the urge to not worry about every single dollar that escapes your wallet. I use Intuit Quicken but there are other options for tracking your money. Once you know how much you are spending, you can make intelligent decisions about where you can cut back.

2. Reduce your ECRD factor. You may have heard of the Latte Factor™. This infamous concept suggests you stop spending $5.50 on gourmet coffee every morning and replace this expense with a $1.50 basic cup. Saving $4 each workday translates to a savings of $1,000 per year. I’ve written this concept off in the past as a way to focus on small change while ignoring the bigger picture, like making sound decisions about buying real estate, cars, and education.

But your Expensive Coffee-Related Drink (ECRD) is not meant to be taken literally; it may not be a latte for you. The ECRD factor is any recurring expense that can be reduced. Yes, look at your morning drink habit, but also look at your smoking habit, your cable bill, your tendency to dine out, and your choices in the grocery store. Generic brands and store brands for certain products can be good substitutions.

Without much effort, I saved $360 a year by optimizing my cell phone plan and have the same service.

3. Revisit your budget. For those who don’t have a budget, this suggestion should be “Visit your budget.” When your spending is naturally well below your income and you’ve been saving comfortably, budgets are less important. I’ve never been a fan of budgets in the first place, but I’ve used them at certain times in my life when my financial situation warranted. In an economic recession, a budget will help you stay on track. This is something you can control, and managing what is within your control is more worthwhile than worrying about things you can’t control, such as the financial health of the large corporation that employs you.

If you’ve tracked your spending, and cut back on a few reducible expenses, consider formalizing your budget by writing down what you expect to spend each month in certain categories. Here are my thoughts about budgeting and an example budget I established for 2008.

As you budget, consider some of the tenets of frugal living. Use filtered tap water rather than buying water bottles. Use vinegar mixtures for house cleaning rather than buying chemicals. Cook your own food rather than dining out. Don’t drive a car as often as you do. Want to go farther? Eliminate an extra telephone plan. Downsize your car or truck. Downsize your house.

Prevent the need for panic next time

“An ounce of prevention is worth a pound of cure,” according to Benjamin Franklin. Alternatively, “The best defense is a good offense.” Whatever your adage, take advantage of the more fruitful economic times. When you are fully employed and have excess income, this is an opportunity to shore up your emergency fund, pay off debt faster, and invest for the future. Historically, economies tend to operate in cycles, oscillating between periods of exuberance and recession. Level out the volatility by planning for the downs during the ups and refraining from getting carried away in bubbles.

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