Sunday, May 19, 2024

10 financial ‘don’t’s’ heading into a recession

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Just in case you have not noticed, we are heading into a tough market. It was OK when we saw real estate companies laying off employees — that made sense. After all, we have come through an incredibly profitable real estate season and many brokerages were staffed for a market that no longer exists.

However, when Meta, Amazon, Microsoft, Twitter, Snapchat, Intel, Lyft and more are announcing layoffs and hiring freezes, where I come from, that is called “a clue.” Important to note, most of the aforementioned companies have billions in cash reserves, yet they are choosing to downsize and slash expenditures to prepare for the impending recession.

In contrast, many Realtors I know have no cash reserves and are still spending like there is no tomorrow.

A history professor at the college I attended was famous for beginning his first lecture with the following words: “The only thing we learn from history … is that we don’t learn from history.” We are at that point now in the real estate market, and those who pay attention to the lessons learned during the last major downturn will make it, while the rest … probably won’t.

Here are 10 guidelines for preparing for the market that lies ahead:

1. Don’t buy something because it’s on sale

Retailers have sales to motivate people to buy things they would not normally buy. Whether the normal price is too high or the specific item is not top-of-mind, sales are used to jolt buyers into buying things they most likely do not need and, in many cases, cannot really afford.

The logic is simple. “I need to buy this now because the price will soon go back up.” Ironically, most people have lived healthy, satisfied lives without the item in question and, if they refuse to get bitten by the “sale” bug, will continue to enjoy a happy life without that 85-inch screen or whatever else they think they “need.”

Bottom line: If you have managed to live without it until now, you can continue to live without it until we get through the current financial crisis.

2. Don’t buy with credit

Credit is a convenient way of buying something now that you most likely do not “need” and pushing the responsibility for paying for it down the road. The assumption is that while you might not be able to pay for it now, you will be able to afford it later. Heading into a recession, let’s call that logic what it really is: stupid.

Bottom line: You will need to maintain your cash reserves over the next number of months to make it through the recession. If you cannot justify paying cash for it now, then don’t buy it.

3. Don’t buy something unless it is critical to your current survival

We often confuse the words “need” and “want.” As I am involved with a charity that provides help to children without hope, I have been to Africa numerous times. I have walked through a dumpsite adjoined by caves where scavengers live, waiting for the next truck to arrive so they can walk, barefoot, in many cases, through the refuse which includes broken glass and animal waste hoping to find anything to make it through the day.

Let’s be totally honest: most of what we think we need is actually a want, and, unless it is critical to your survival, you should plan on living without it until we make it through this next phase.

Bottom line: Unless it is a critical medical need or something similar, you should be able to survive without it.

4. Don’t buy anything new when used will do

I have purchased a few new cars in my life, but the majority have been used. I have discovered a very important fact: Regardless of whether it was new or used, they all got me to my destination just fine. The only thing that suffered by driving a used car was my pride.

While it is totally awesome to be able to order a new vehicle to your exact specifications, the old adage, “It loses a significant amount of its value the moment you drive it off the lot” is absolutely true. When you buy something used you might not get the latest features, but truthfully, in many cases, those features are not critical to the purpose of what you are buying.

Bottom line: Buy used instead of new, and pay cash. If you do not have the cash for the purchase, then it is best to wait until you do.

5. Don’t buy 2 when you need 1

Years ago I heard someone joke about their purchases at Costco by stating, “By buying bulk quantities of everything, I am saving myself into bankruptcy.” Unless you are storing up for another pandemic, you probably do not need a three-year supply of toilet paper.

You also need to watch out for the infamous BOGO offers. If you only need one, buy only one. Look for the item you need at a discounted price. In most cases, BOGO offers are for items at full retail price.

Bottom line: Do not be lured into the trap of buying more than you actually need. If you find yourself giving away things you have purchased or putting them somewhere where they gather dust over the next number of months, then you bought too much and spent money needlessly.

6. Don’t buy the most expensive version

I grew up in the era of Timex watches and Bic pen commercials. They would do crazy things like strap a watch to a boat propeller or shoot a pen through a piece of wood. I can still remember the Timex slogan, “It takes a licking and keeps on ticking.” In the case of the watch, which was extremely inexpensive, no matter the abuse, it would continue to work.

In the same way, the Bic pen was only 19 cents, and could also stand up to significant mistreatment. The moral here is simple: While it may be nice to own expensive things, unless you are independently wealthy and earn more interest on your investments than you can actually spend, this is not the time to be buying a Rolex or Apple watch when a cheaper version will tell time just as effectively. The same goes for a Montblanc pen.

Again, it comes down to pride. To “keeping up with the Joneses.” If bad financial decisions are going to be made heading into a recession, then let the Joneses be the ones making the stupid choices while you maintain better control over your cash.

Bottom line: Do not fall into the trap of buying a luxury item when you cannot really afford it.

7. Don’t make impulse purchases

An impulse purchase is something you buy on the spur of the moment that you either were not planning on buying or did not include in your budget. For some people, this is a constant litany of small things: candy (any item surrounding a store cash register), clothes, trinkets and so on. For others, it can include cars or other big-ticket items.

Many people own a timeshare because they fell for the line, “This offer is only good today.” People who make snap decisions to buy something frequently regret it later. In fact, impulse buying can be addictive because the immediate rush of serotonin makes you feel good about what you just did. In most cases, impulse buys are things you do not need and require money you cannot afford to spend.

Rachel Cruz on behalf of the Dave Ramsey organization states, “Americans impulsively spend an average of $276 every month. That adds up to an extra $3,312 spent every year and about $198,720 in a lifetime!” She continues, “I had to plug those numbers into our retirement calculator. And listen — if you invested that $276 every month for 10 years at an 11 percent average annual rate of return, you’d have over $59,000! Nothing like the magic of compound growth to put things into perspective.”

Bottom line: Resist the urge. Have a checklist you go through before making any purchase that includes the following questions:

  • Do I really need this or just want it?
  • Do I need the money for something more important?
  • If I wait 24 hours would I still make this purchase?
  • Does this purchase fit into my overall financial plan?

8. Don’t continue to pay for things and services you do not need

A great example is the number of entertainment subscriptions available. In the good old days, you turned on the TV and watched your favorite shows and endured the commercials. To avoid this, many have started watching subscription programming including HBO, Netflix, Disney and so on. The list is endless.

Ironically, in order to boost revenue, many subscription channels are starting to display … wait for it … commercials. Since many people do not pay attention to their credit card bills, they never add up all their monthly subscriptions. If they did, in many cases, they would be shocked.

Truth is, even though they are paying for all the channels, they can only watch one at a time. While it might be nice to have all that choice, in a depression, it is not wise. While I am picking on entertainment, there are plenty of other subscriptions out there that have the same effect.

Bottom line: Go through all your subscriptions, and start chopping.

9. Don’t replace, repair

Whether it is the roof on your house or your car, it is better to repair, in most cases, than replace. While replacement may be necessary down the road, this is not the time for large capital expenditures.

Bottom line: Figure out a way to live with what you currently have, and only spend money on true emergencies.

10. Don’t buy bling

Seriously. This is pride at its worst. Some people think they need to show off their “wealth” by hanging stuff out there for all to see. King Solomon had a commentary on this in Proverbs 13:16, “Every prudent man acts with knowledge, but the fool flaunts his folly.”

By contrast, some of the wealthiest people in the world drive ordinary cars and live in modest homes. Rather than spending money to bolster their egos, they invest to build a solid financial platform that will support them through tough times. Warren Buffett would be a great example here.

Bottom line: Don’t bust your budget buying bling. Stop showing off, and put your money where it really matters.

While there are many more ways to be financially sensible in the days that lie ahead, these 10 would be a good start. Those who manage their finances wisely in the next year will be the ones who emerge from the recession in good fiscal condition.

In reality, a recession is a great opportunity to build wealth so long as you have money to invest when the opportunities arise. Those impulse purchases may come back to haunt you when you are presented with an awesome investment opportunity but have no ability to capitalize due to past financial recklessness.

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