The road to economic recovery

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During the past 21 months, we have witnessed the worst economic decline since the Great Depression. Our economy has been through a historic death defying adventure. It was rescued through unprecedented actions by the Federal Reserve Bank and the Federal Government.

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As we enter the fourth quarter of 2009, it appears that the economy has “bottomed out” and we are about to enter a period of economic recovery. The big questions being asked by many economists is how strong the recovery will be and will it be sustainable. According to Dirk Hofschire, President of Market Analysis at Fidelity Investments, “there’s a growing chorus of skeptics predicting that growth will be tepid at best in the near term. But historically, steep economic contractions tend to give way to sharp recoveries.”

 

The business cycle

Traditional economics explains the ups and downs of the general economy as a normal part of the business cycle. During a recession, general business activity decreases, unemployment increases and prices generally moderate. At the bottom, business is bad, jobs are hard to find and the “gloom” seems to stretch forever. During a typical economic recovery, the stock market rallies, general business activity rises, employment increases and because of potential shortages, prices generally rise and inflation increases.

Over the last two years, I have written several columns on how to prepare for an economic downturn. Now that we are on the road to economic recovery, I would suggest moving to a more aggressive personal financial planning posture.

A recovery plan

There are several steps that you can take to improve your financial position during a recovery, without exposing yourself to excessive risk.

Employment—If you maintained your employment with the same company during this recession, consider yourself “a keeper.” You probably have witnessed layoffs, reduced budgets and a lot of anxiety on the job. Now, because of lean staffing, there should be opportunities for promotions and advancement.  Talk with your manager and mentor about your opportunities for promotion. Make yourself more valuable by taking advantage of opportunities to get additional training and broadening your skill set. Invest any salary increases, overtime pay or bonuses in improving your financial situation.

Update your resume and maintain a broad professional network outside of your current employer. There may be some new job opportunities that you may want to consider.

Investments—During an economic recovery most investments are affected positively.

Invest fully in your 401K retirement plan and make sure that your investments are diversified and in line with your risk tolerance.  However, don’t hold more that 5-10 percent of your net worth in company stock. If you have investments outside your company plan, select a good mutual fund company and go for quality. Watch out for “get rich quick” schemes that are sure to proliferate.

Emergency Fund—Build up a short term savings account, with a balance equivalent to 3-6 months of your expenses. The purpose of an emergency fund is to carry the family through short term emergencies, such as job loss, physical disability or a natural disaster. An emergency fund will preclude the use of credit cards with interest rates of 18-26 percent or higher.

Reduce Your Debt— Now that the economy is turning around, take this opportunity to reduce your debt and improve your credit score. Selectively purchase what your family needs in a planned fashion. If you have credit card debt, begin to work it down now. If you get overtime or a second job, use the money to pay down debt.

Talk to Your Family—Discuss your financial concerns with your family. Let them know that you are expecting an economic recovery and that this is an opportunity to improve your financial position. Be open and honest and get their ideas for managing the situation.

Future economic concerns

As stated earlier, the Federal Reserve Bank and the Federal Government took unprecedented actions to stave off a deeper recession. These included rescuing near bankrupted financial institutions and a federal government economic stimulus program. These actions will have future economic consequences such as; higher inflation, higher tax rates and significantly higher interest rates. We’ll talk about those issues at a later date.

(Michael G. Shinn, CFP, registered representative of and securities and investment advisory services offered through Financial Network Investment Corp., member SIPC. Visit http://www.shinnfinancial.com for more information or to send your comments or questions to shinnm@financialnetwork.com.)

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