Recession

I was watching the Oprah show yesterday and it was about putting a face to the recession in the United States. It focused on the people who have lost their jobs and as a result were unable to make payments on their mortgage. Due to the fall of the real estate industry, the houses that they bought were now worth less than the bank loan they took to purchase the house in the first place. Unable to pay their mortgage or sell their house and other belongings, the homes, cars, etc. were eventually repossessed by the bank.

In one story, Favor and her three young children, Breanne, Noah and Hannah, drift from shelter to shelter with their black garbage bags containing their worldly belongings - toiletries, shoes and warm clothes. When journalist Lisa Ling interviewed Noah, an 11-year-old boy who received a Nintendo Wii for his 10th birthday, he says that he would be happy with just a cake and a lot of love this year.

The message of yesterday's show is that this could happen to anyone - lower class, middle class and even upper class. There's a story about a couple in their fifties who were previously generating six-figure incomes from their business and now live in their office after losing their home. They were quite optimistic in that they considered this to be a 'temporary setback' and that they will retire in their late sixties.

I'm all for thinking positive and hoping that things will one day get better. But in the meantime, how do we keep ourselves 'recession-proof'? Maybe this is where the age-old adage of living within your means comes in i.e. if the house is too expensive, don't buy it.

My mum, my aunt and my late grandmother have always stressed this to me. If you can't afford it, don't buy it. No point being in debt for something that you just don't need. For example, you don't need to buy a car for RM100k if your salary is barely enough to cover your household expenses.

I found some interesting advice on Oprah.com given by Financial Advisor Suze Ormon. She says that there are 5 steps we can take to save ourselves from recession.

Step 1: Live on half your income.
Only spend half your income and put the rest in the bank. I guess if half your income is not enough to pay the loan repayments, don't buy the new house/car/TV/handphone/laptop.

Step 2: Stash the cash
"Cash is king" she says. Everyone should have an eight-month emergency fund so save as much as you can and only make the minimum payments on credit card bills (if the amount is very low and the interest rate is ok). Apparently, US credit card companies have been closing down some of the fully-paid accounts so if you no longer have a credit card, you will need to have cash onhand. I don't know whether this will happen in Malaysia or Australia though but it's good advice nonetheless.

Step 3: Make use of the stimulus package
Hmm... I don't think we have this in Malaysia but apparently in the US, the government helps those who have been laid off by giving subsidies to health insurance, home loans, etc. So keep an eye out, I'd say.

Step 4: Make your home affordable
There's a US government plan to reduce the interest of mortgages by way of refinancing at a lower interest rate, even if the value of the house has reduced. It would only work if the payments have been current. This is good advice I would think, being the daughter of a banker. Mum's done this and she explained the process to me a few years ago.

Step 5: Look at what you have, not what you had
Great for keeping everything in perspective.

In the end, I think it all boils down to being smart, disciplined and prepared. If like me, you are also unemployed, keeping track of all this advice would help. After all, it's only a matter of time before we rejoin the working world.