Bailouts, the R-word

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This year will go down in the record books as a major inflection point in our country’s economic history. There have been major financial institution failures. These failures and the credit freeze precipitated the unprecedented and highly controvers

This year will go down in the record books as a major inflection point in our country’s economic history. There have been major financial institution failures. These failures and the credit freeze precipitated the unprecedented and highly controversial $700-plus billion government bailout of Wall Street.

The current economic scorecard paints a rather dismal picture. The consensus forecast for the next two quarters is for slow or negative growth for the domestic economy. We are either in or headed into an economic downturn.

The questions that you and your family have to answer are, in the short term, how will a downturn affect your employment, income and lifestyle? Looking at the long term, how will a downturn affect your funding for longer term goals such as housing, education and retirement planning?

The R-word

An economic recession is defined as a decline in real Gross Domestic Product for two or more successive quarters. This is a period of significant decline in economic activity spread across the economy. A recession is characterized by higher unemployment, declining personal income and lower industrial production. According to the National Bureau of Economic Research, our last recession bottomed out in November 2001, and the U.S. has been in an economic expansion ever since.

Downturn survival kit

There are several steps that you can take to minimize the impact an economic downturn may have on you and your family.

Employment–If you are employed by a company, the decision about whether you stay or go is going to be made by someone other than yourself. Outside of seniority rules, the individuals with the most diversified job skills may have an advantage in keeping their jobs. To make yourself more valuable, take advantage of opportunities to get additional training and broadening your skill set.

Keep your resume up to date and maintain a broad professional network outside of your current employer.

Emergency fund–Build up a short term savings account, with a balance equivalent to 3-6 months of your expenses. The purpose of an emergency fund is to carry the family through short-term emergencies, such as job loss, physical disability or a natural disaster.

Reduce your debt–The impact of debt is magnified during an economic downturn. Individuals with heavy debt loads are stretched to the limit and beyond. Late payments are compounded by late fees and interest charged on interest. Do not create any additional debt in slowing economic times. If you have credit card debt, begin to work it down now!

Investments–During an economic downturn most investments are affected negatively, however, the effects may be minimized by having a well-diversified portfolio. If you work for a company, don’t hold more that 5-10 percent of your net worth in company stock. If you have a 401(k) retirement plan, spread your investments among several funds. If you have investments outside your company plans, select a good mutual fund company and go for quality.

Downturn opportunities

Downturns can present some financial opportunities. In a downturn, “cash is king.” Since interest rates are generally lower, it may be easier to refinance mortgage loans at lower interest rates. Just like major storms, economic downturns are a regular part of life. You and your family can better weather a downturn if you are prepared with your downturn survival kit.

Michael G. Shinn, CFP, Registered Representative and Investment Adviser Representative of and securities offered through Financial Network Investment Corporation, member SIPC.

Copyright 2008 Chicago Defender. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.

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