Father Sez

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Are YOU ready for a 1930’s strength recession?

Wednesday, April 23rd, 2008

There is a growing chorus of predictions that we are about to have or may already be in a recession of a strength and depth not seen since the 1930s’.  

Seeing the events unfolding all around us, this is not surprising.   

- Oil prices are predicted to hit USD200 per barrel  

- Food prices have been on the way up and are not showing any signs of stopping their climb. 

- Corporations are tightening belts and as usual one of their first targets would be reducing employment costs by way of mass layoffs. 

-  A number of the big banks are walking around with hat in hand seeking infusions of capital to stay afloat.

Many of the personal finance bloggers (myself included) and probably many of the financial journalists around would not have gone through or were too young to fully appreciate the difficulties of the 30’s Depression. I guess the best lessons would be scenes from movies as opposed to books or articles. After all a picture does say a 1,000 words.

For me, reading JD’s post on his review of the book “A Tree Grows in Brooklyn” transported me mentally to the time of 1901. I would strongly recommend that we should all read JD’s excellent post again and soak in very sound financial advice.

You may have heard the story of a frog which was put into hot water. It immediately jumped out. When the same frog was put into room temperature water and the water slowly heated up, it stayed there till it died. An economic recession also works in much the same way. Slowly it envelopes us and before we know it, we are down and out!

I think there are enough experts saying that this depression scenario is a given, and enough saying that times are different now, so the recession won’t be so bad.

Whatever the final expert opinion may be, rather than being the frog in slowly heated up water, it should be mandatory for us to prepare and run through a checklist to see how well prepared we are.

Going through the blogs and other articles on preparing for a recession, a reasonable checklist seems to be :-

a) Cut down fixed expenses, especially debt payments

My family has already taken the first step towards achieving this by selling of one of our assets, a house we have had for the past 16 – 17 years. The proceeds of which are earmarked for some serious debt reduction.

b) Practice frugality to the hilt.

Blogs like Lynnae’s Being Frugal (see her post on frugal tips to survive a recession) and other posts like GLBL’s suggestions on how to save on groceries should become staple reads for all of us. Tips learned should be applied to bring down the cost of meeting our needs. Of course all wants should be postponed to a later time.

c) Aim for and become as indispensable as you can at your workplace

d) Cultivate skills that will be in demand.

We have started a goat farm. Though it has been said that handyman skills like plumbing, electrical repair work, etc will be of particular use, since people will try to stretch out the useful life of their property, I think being a vendor of food products via our goat farm will be useful.

e) Reduce the dependence on the money economy.

I particularly liked this statement I read in Wise Bread. Growing some of our own food, making our own clothes, doing our own cooking, own laundry, barter etc may be classified here. We intend to grow our own vegetables and raise chickens also on the farm. I think this should help bring our monthly food bill considerably.

f) Have a healthy emergency fund

My emergency fund has been somewhat depleted due to some unexpected expenses as well as additional investment on the farm. My wife and I have made provisions to replenish it from the proceeds of the sale of the house.

g) Stockpile medications and Independent Health insurance

I have some ongoing medication costs. Since reading about the generic alternatives I have changed “brands” and the cost has gone down considerably. I don’t intend to seriously stockpile the medication, as I carry about 3 month’s requirements currently and will replenish once it goes to two months. We have always had our own health insurance, so there is no dependence on my employer.

Having never experienced the financial effects of a recession directly, much less a 1930’s grade one, I am not really sure how I’ll fare raising myself and my family, if one hits.

For now, I just want to prepare mentally for the worst.

For obvious reasons, this is a popular topic and other more knowledgeable bloggers have also written their views. Some examples are listed below. 

i) io9”s 12 ways to prepare for the next great depression. 

ii) Blunt Money’s Nervous about a potential layoff 

iii) KC Lau’s How a recession happens and 8 tips to prepare for it 

iv) Money Central’s How to prepare for a recession 

v) The Wastrel Show’s How I am preparing for the proposed Recession 

vi) Wise Bread’s Preparing for a recession 

vii) The Digerati Life’s Recessions and the State of our Economy

Picture Credit: Google Images 

We have sold the house

Sunday, April 13th, 2008

This journey, leading to the signing of the S & P last Friday, started shortly after my wife and I studied the first ever family budget that we had done. Not good! 

Then we did a review of the family loans and applied the DTI ratio that I read about in Moolanomy. (The Digerati Life has also written about this. Both are very useful pieces of information for would-be borrowers and others like me, who may never have run a health check on our loans.)  The results of the loan review were, needless to say, not good, and this was the final straw that led to my wife and me deciding to put up the house for sale.  

(We bought this house quite sometime ago. About ten years ago, we shifted and this house has been rented out since then.) 

I have read that some bloggers, like Brooke would prefer to handle the sale themselves. We appointed an agent and are very happy with her efforts. Still, I must mention that there was hardly any interest, until I followed FMF’s sound advice on not making the single biggest mistake of home sellers  

I have now signed the S & P agreement, and the buyer has paid the 10% deposit. There are still a few formalities to be settled before the property actually changes hands, and we receive the rest of the money.  

My wife and I have agreed that the proceeds, after paying the costs of the sale will be used primarily for debt reduction. Our loan profile “before” and “after” our planned debt settlement will be as shown below.  

All figures in %

 Before  After
     
 Overdraft             7.00               -  
 Car Loans           60.00               33.00
 Mortgages           33.00               67.00
     
 Total         100.00             100.00

Some amounts are being set aside now for family expenses expected to arise over the next couple of years. (This was at the reminder of my wife and I think it is lucky that I did not overlook this.) 

At the time of the loan review, we figured our “after sale” DTI (Back ratio) to be 7.40%. The present estimates (after debt reduction and amounts set aside) are at 11.80%, still a fairly respectable rate, I think.  

The sale also marks another milestone of my plan to quit the rat race 

Selling the house was not that simple a decision to make, despite the fact that we had not been living there for almost 10 years. The house is in the capital city (we now live in a slightly more rural setting, about 60 km away from the capital), and there were thoughts about shifting back to the capital someday.  

Even after making the decision to sell, signing the S & P was another toughie. There are emotional ties to the house.

I’ll write more about this tomorrow.  

 

Can a windfall really change people’s lives?

Monday, February 18th, 2008

I remember reading in Readers Digest quite some time ago, that should all the money in the world be equally divided amongst everyone, in less than 3 years, the wealth would go back to the earlier distribution.

RacerX wrote about the “buy out packages” being offered by Chrysler to some of its employees. By taking a sum of money, maybe equivalent to about 2 - 3 years of salaries, the workers were expected to walk away and begin life anew. Without the safety net of the Chrysler salaries.

I am not sure if this offer has been completed or how many workers accepted the offer.

I believe most people used to receiving a monthly salary and spending it, attain a certain mind set. A mindset of spending what they have. To be sure, some of the money will go towards savings / investments. However, I dare say that a large amount will go off towards some sort of consumption or another.

And sooner rather than later, they will be left with no job, and no money.

The same has been demonstrated in Malaysia.

a) We have a Government regulated compulsory savings scheme. The employer pays 12% and the employee pays 11% into the Employee Provident Fund (EPF) which manages the funds and pays dividends yearly. The contributions are tax deductible.

EPF officials have been quoted saying that their studies indicate that the people who withdraw their savings in a lump sum upon reaching the age of 55, tend to spend their savings off in 3 years!

b) We also have a Federal Land Development Authority(FELDA). Set up in 1956, it was part of an ambitious plan by our country’s then leaders to create income opportunities for a vast number of underprivileged people. The Government parcelled off huge chunks of land in 5 acre parcels to families who wanted to grow cash crops, mainly rubber and palm oil.

See Wikipedia’s write up on FELDA.

The Government also made large investments in palm oil mills which provided a ready market to the farmers producing the palm oil fruits.

Over the years, some of these land parcels were seen by property companies as having development potential and enticing offers were made to the FELDA settlers. Not surprisingly, a number of the settlers took up the offers and became instant millionaires.

Our tabloids were full of stories of a number of these instant millionaires buying cars, building mansions, swimming pools, taking on second wives and the like. Basically squandering away the funds.

Those of us who are used to receiving regular payments as salaries and use that to manage our financial lives have to be very very careful, when we receive lump sums or windfalls. No matter how we may have planned the utilisation, a little by little the amounts may be frittered away

It would be good and very useful to revisit Mighty Bargain Hunter’s write up on piggy banks and choose the very best model available.

I am also expecting a significant part of my retirement to come from EPF. I must, must remember to follow this advice!!!

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