Make Your Money Recession

By on Thursday, 21st July 2011

The economy is not only emerging as a — or the — leading issue in the presidential campaign, it’s becoming a top-of-mind concern for Americans from Main Street to Wall Street. But fear not — The Early Show‘s resident financial guru, Ray Martin, spells out a plan in this column to shield your pocketbook from potential harm.

There?s a rising anxiety about the U.S. economy. Fueling this is the news of major financial companies taking huge losses due to subprime mortgage defaults, slumping home values, and consumers’ purchasing power being sapped by high energy and food prices. If you?re concerned about a coming slowdown in the economy, you are in good company: Most economists surveyed are predicting a slowdown, at best, and a full-blown recession at worst. A growing chorus of Wall Street investment banks, including Goldman Sachs, Merrill Lynch and Morgan Stanley are stating that the slowdown in the U.S. economy will turn into a recession.

According to public opinion polls, almost six-out-of-ten people believe the economy is already in a recession. An interesting indicator, the ?R-word? index? — the number of stories appearing in the Washington Post and New York Times that use the word ?recession? — has spiked in early 2008. According to The Economist, this simple tool pinpointed the start of the recessions in 1981, 1990 and 2001.

You only have to go back to 2001 to remember the last recession that hit the U.S. economy — marked by the collapse of the NASDAQ stock market bubble, 9/11, and job losses.

But what is a recession? What does it mean for the economy this time? How will a recession affect you and your money?
Generally, a recession is a prolonged period of time — typically six-to-12 months — when the economy is slowing down, or contracting. Recessions are nothing new: There have been 11 since 1945, and these are a natural part of the economic cycle.
Recessions are characterized by several trends, including a slowdown in consumer spending, a decrease in production at factories, rising unemployment, falling personal income, and a volatile and falling stock market.

Is the US economy in a recession? Well, consider this: Consumers spent less than expected during the recent hliday shopping season, recent job figures showed a rise in unemployment, person income has been diminished by higher prices of food and energy, and the U.S. stock market has fallen over 10 percent since October of last year. That?s four-out-of-five of the above trends that signal a recession is coming, if not already upon us. People need to know that a recession can affect two things – job security and interest rates — and they need to connect the dots between this and their money.

With evidence of a slowing economy and grumblings of job cuts in the financial sector, workers need to buckle up and check the strength of their financial safety net. Here are a few financial moves to soften the blow.

Build a Cash Cushion

The average length of a job search is five months. It could take even longer if you are employed in the financial sector that?s in turmoil because you might need more time to shift your skills to a career with more opportunity. For this reason, it?s important to have at least three-to-six months of cash on hand, or more if you are the sole income earner or self-employed.

Consider these moves to increase your cash cushion:

  • Decrease your 401(k) plan contributions to the minimum required to collect your employer?s company match (typically six percent of your pre-tax pay). The increase in net pay should be used to build up your emergency fund.

  • Eliminate all unnecessary payroll deductions, such as savings bonds or charitable contributions. Use this cash to bolster your savings.

  • Reduce your income tax withholding from your pay, especially if you typically receive a tax refund. Over 70 percent of all tax filers — about 95 million folks — receive a tax refund each year, and the average one is more than $2,500. Of course, a large tax refund feels good, but larger take-home pay NOW will help you to build your cash cushion more quickly.

    Here?s why getting a tax refund every year is not a smart thing: When you get a large tax refund, this simply means that you are having too much in taxes deducted from your pay. Since you only settle this overpayment up with the IRS once each year, at tax time, you are letting the IRS keep this money as an interest-free loan. Would you overpay your cable bill or overpay your rent by several thousand dollars just to ask for it back a year later without any interest? Of course not!

    If you could use the cash instead of giving the IRS a zero-percent interest loan, then reduce your tax withholding by increasing your withholding allowances, changing your withholding status, or both. Here is how to do this: Complete a new form W-4 and submit it with your employer?s payroll department. Do it now, so that the change will be effective for the next pay period. You can then put the additional cash you’ll get in your paycheck to work increasing your savings.


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