Tips for surviving tough economic times Following a few simple rules will protect you, two local experts say.

Cindy Larson

Dec. 27, 2008 (McClatchy-Tribune Regional News delivered by Newstex) -- Editor's note: This is one in a series of stories The News-Sentinel will publish about the recession's effects on the area, with advice and perspective for local residents.

The stock market is in the tank, unemployment is up and the local food bank reported a 205 percent increase in emergency assistance over last year. And officials recently confirmed -- as if we didn't already know -- the country is in a recession.

But what exactly does that mean if you're one of the lucky ones who hasn't lost your job? If you're still drawing an income, should you nevertheless start making cutbacks? Cancel a vacation? Put off buying a new vehicle? Dump a bunch of poorly performing stocks?

The answer, of course, is different for everyone, but local experts offer two universal pieces of advice: Don't panic, but don't spend irresponsibly, either.

Putting it in perspective

"With a system such as ours, there are routine business cycles," said David Dilts, department chair and professor of economics at Indiana University-Purdue University Fort Wayne. "This one's a little more severe than what we've experienced."

The average recession lasts 18 months, he said. "This is not going to last forever."

However, Dilts predicted the country hasn't seen the end of the credit crisis yet. People who financed expensive vehicles or who carry balances on several credit cards, and those who have lost their jobs, may not be able to make payments. That could cause further problems in the credit market.

Also: The low prices on gasoline aren't going to last forever either, he said. In fact, Dilts said those low prices are a result of lower worldwide demand and actually are a sign of how bad things are right now. He expects to see gas prices go back up as the economy recovers, but not as high or as fast as they did earlier this year.

The uncertainty of what will happen in the automotive industry also is affecting our regional economy, largely because so many businesses -- and their employees -- are tied to that industry. Many of those employees, fearing a job loss, are likely cutting back on spending. "We don't have a very diversified portfolio of industry in this part of the world," Dilts said. "We live and die by the automotive industry."

Personal finances

The scenario is different for those who aren't living in fear of losing their jobs. But with so many people suffering economic hardship this year, even those with jobs might not be in the mood to spend with abandonment. Dilts suggested others consider doing what he does: increase charitable giving. "I get a warm glow from that," he said, just as he does when he gives a friend or family member a special gift.

When it comes to spending, even if you're working, it's prudent to be particularly mindful of your personal finances during troubled economic times.

"Security is something that we've taken for granted in this country," Dilts said. "We don't have a big social safety net under us."

His advice: "Maybe you should pay off those credit-card balances, so you're not in a world of hurt if you lose your job."

As someone who spends his days counseling those who are having problems with their personal finances, Tom Hufford can identify with that suggestion. Hufford is president of Consumer Credit Counseling Service Inc. of Northeast Indiana, a nonprofit agency that helps people solve financial problems.

Hufford's advice is admittedly old-fashioned and simple, if not easy to do: curtail spending; build savings.

"I'm so traditional, it's revolting," he said.

Hufford suggests people have two types of savings: a 401(k) for retirement, and a cash reserve in something "boring," such as a regular old savings account. If people had some liquid cash reserves, it would head off 80 percent of the problems he sees. "If most people obeyed these simple rules, we'd be out of business," he said.

His agency recommends people keep three months of net income in cash reserves. In many cases, doing so will stave off having to tap into a 401k prematurely, which has severe tax penalties. "It's a shock absorber, an alternative to using plastic," he said of that cash reserve.

For those who wind up with more money owed on their credit cards than in their savings account, Hufford recommends leaving the money in savings and paying down aggressively on the credit balances.

He also recommends putting a set amount in savings each pay period using direct deposit -- and then not touching it. He says people are better off "to save $10 a week that stays than $40 that doesn't."

Hufford also warns of "budget busters" -- holiday spending, insurance premiums, property taxes, license plates. People know these expenses are coming. He advises if you plan to spend, say, $1,000 at Christmas, then stash away a little money each month, beginning a year in advance, so you can pay cash rather than face a huge credit card bill in January.

But how about buying a car? Many people will struggle just to keep that three-month safety net intact. Saving for a vehicle may seem impossible.

Hufford offers several suggestions, starting with never buying a new vehicle because it will depreciate so much in that first year. He also said, "I don't think you ought to go over a four-year loan," adding that a seven-year car loan was one of the worst ideas ever. He recommends putting as little money down as possible and negotiating the lowest payments possible, and making an extra payment now and then when finances allow.

"A car is a depreciating asset," he said. "Make smaller payments and invest in something that's an appreciating asset, like a 401(k)."

Investments

Many with investments in the stock market are poorer that they were this time last year. Their investments may be worth only a fraction of what they were a year ago. So should they cash in their investments and stash the little money that's left under the mattress?

Of course not, Dilts said, encouraging people to stand back and take a longer view. "The way you do well in the stock market is you buy low and you sell high," he said. "That's something I think people forget in the middle of something like this. When the Dow's 14,000, that's not when you buy."

In fact, this is the time to look for companies that are doing well and are badly undervalued and buy some of that stock, Dilts said. On the other hand, "you don't hold on to financial companies that are overly leveraged (or) on the verge of bankruptcy."

Live within your means

Being financially responsible is a daily commitment, not just something to do when times are tough. Often it boils down to making choices, Hufford said. His motto: "You can have anything you want, but you just can't have everything you want."

Dilts warns that credit is not a method to finance living beyond your means. He suggests people plan for things getting worse and be thankful if they get better.

"Surprises are always best if they're pleasant," he said.

Newstex ID: KRTB-0071-30736047