The impact of the economic crisis facing the country has started trickling down to lay persons like us. I was speaking to my sister Samantha over the phone just a while ago which actually prompted me to post this blog. Samantha works in an IT company which has just announced its plans to lay off employees. Thankfully she does not feature in the firing line. But she was worried that any time soon, it could be her turn to be shown the door.

There are many reasons why companies lay off employees. When the economy was bullish orders were flowing in big and fast and companies needed people to execute the work. Now that there is a slowdown, orders start dwindling in size and number and in effect the requirement for the human resource also goes down. To add to the misery of the companies banks have started restricting loan disbursal to businesses or charge higher interest rates due to the liquidity crunch, throwing a spanner in the development plans of companies. These are just two of the many reasons why jobs are laid off.
It is important to be prepared for the worst in such times and let me suggest how:

1. Start creating an emergency fund
Traditional wisdom suggests that one has to save around 3 months of one’s salary as an emergency fund. If you have not done it so far, it is not too late to start doing it. Check all the possible ways in which you can save money. It is ok if you do not spend your weekends at the mall or hangout for a beer with friends for a few weeks, at least until you have saved up a decent sum for your emergency needs.
 

2. Get mentally prepared
As much as the financial preparation, it is important that you mentally prepare yourself for the worst. The emotions of people getting laid off range from anger, guilt, low self-esteem to a feeling of helplessness. Understand that when you are in a boat and the stream is rough you just have to sail along. No point finding faults with your boat or cursing your fate. Remember there are things beyond your control. Just keep telling yourself that it is just an opportunity for your to realise how tough you are as a person.

3. Start networking
Even as you are still in your job, rummage through your phone book, revive old contacts, make calls to people who matter, just to say hello. Let people remember that you are still around. You can subtly hint them that you are looking for a change in job. You can also start circulating your resume among friends and job sites.

4. Prioritize your debts and investments
Make a list of the debts and loans to be paid off and prioritize them. By paying your secured loans like mortgage and car loans regularly you can ensure that they are not seized for non-payment. Try not to default on your insurance premium payment either; else the whole purpose of having a policy will be lost. And avoid breaking your 401(k) or retirement plan as much as possible. Withdrawals from your retirement plans are subject to taxes and a 10% penalty as well.

 

 I am sure all you chums out there know by now that the country is going through a very serious financial crisis, unless you have been on a long sleep like Rip Van Winkle of the fairy tales. The economists and financial analysts worth their air time have been comparing this to the Great Depression of the 1920’s. So what exactly happened during the Great Depression of the 1920’s when almost none of us were born and how does the present situation compare with that? Let me explain.  

Wikipedia says that the Great Depression of the US started in 1929 with the stock market crash followed by a decade of unemployment, poverty and low economic growth. Though the reasons for the Great Depression (let me refer to it at GD, henceforth) are not certain, it is believed that it was caused by a combination of bad loans, badly regulated markets that also resulted in financial misappropriation by banks and financial institutions. The impact of the failure in financial markets was felt in other sectors like farming, construction and manufacturing. The financial crises snowballed into a global phenomenon as other countries also felt the impact of the GD.

Check that with the current situation- bad mortgages, subprime woes, layoffs, rising levels of unemployment and skyrocketing prices. History seems to be repeating itself. The ripples of the current economic slowdown have already reached Europe and parts of Asia. So going by how things worked during the GD, does that mean the worst is yet to come for us?

Not exactly, say the financial experts. First the government and the regulators have been swift in reacting to the financial distress as compared to the GD when they were largely mute spectators. The US Federal Reserve’s $700 billion bailout package is certainly a debatable decision but what cannot be denied is that it has insulated the banking and financial system from a large depression. As for the financial security of individuals, it is taken care of with programs like Social security and unemployment benefits, which are actually the results of lessons learnt during the GD.

Another difference between then and now is that the GD was sandwiched between World War I and II leaving little time and resources for the economy to limp and hop back to normalcy. The situation is different now, though few economists point fingers at the presence of American troops in Iraq and the precious resources required to station the troops there.  

The slowdown is certainly affecting us, no doubt. The stocks that we have invested have tumbled, our bank deposits interest rates have dwindled, prices of essential goods are rising and getting a loan may be a bit more difficult in the days to come with the threat of layoff and job cuts also around. But the past lessons learnt have helped the common people and the establishments to be better prepared to handle the situation. Economies always have the boom and bust cycle. The bust has just begun and we just have to keep our fingers crossed for it to pass off soon.

I’ll never forget my first paycheck. When I was a kid, my parents gave me an allowance for doing chores around the house, although I think I spend more time trying to figure out how to get out of doing them. I earned additional cash here and there mowing lawns, babysitting, and I even had a paper route for all of a few weeks. But, I’d always been paid in cash or the occasional personal check. My first real paycheck was something different. All of a sudden, I was a wage earner and a tax payer and it made me proud. Made me feel grown up.

Of course, that first paycheck and the ones I collected for the next few years were meager and were usually spent in an afternoon at the mall and an evening of pizza and beer with friends. The days leading up to my next paycheck were usually pretty sad. I lived a duel life. I was rich, then poor. Rich again, and then poor…you get the picture.

Much to my surprise, when I finished school I was employable and joined the White Collar workforce. Now my paychecks feature a couple more digits and a comma separating them! What a time to be alive! The extra cash lifted me out of the boom and bust cycle I’d been in since that first paycheck. All of a sudden I had more money than I knew what to with. So, I did what any good American does. I went out shopping!

First, I upgraded my car and then I moved into a new, bigger apartment with a friend. Next, I furnished that apartment; flat screen TV with surround sound, sofa, chairs, tables and random things too numerous to list. My place is great and I my ride is ‘Pimped’, but guess what? I’m now back to that boom and bust cycle I thought I’d left behind forever.

Turns out, after I pay the bills my much bigger paycheck looks a lot like that first one. It feels like I’m now paying a lifestyle tax and that tax eats up a lot of my earnings. But hey, I’m college educated, I should be able to figure this out, right? Well actually, I have figured some of it out. Since I didn’t acquire and pay for my new lifestyle as part of some organized plan, when the major spending was over, the aftermath was just a bit shocking. But now I do need a plan. A plan for how to budget my money so I know how much I have left to spend after my bills are paid. And I need a plan to execute and track my progress.