How to Survive a Recession

LESSON 14: Cut Your Cash Expenses

Cash is king during a recession. Without adequate positive cash flow, you cannot pay for necessities and will eventually face a liquidity crisis that can force you to sell off assets at unfavorable prices to pay your bills. Donald Trump, one of the most successful real estate investors of all time, faced his first bankruptcy because his Atlantic City casinos and Trump Airlines were bringing in less cash flow than they were paying out. Since Trump was highly leveraged (he used other people’s money to fund the growth of his empire), the cash flow drop put him in default on hundreds of millions in loan repayments. Trump had to sell off some of his most prized properties for less than their long-term investment value to avoid bankruptcy

The key to saving cash is to look at every part of your life and business and ask the question, “is this absolutely necessary for survival?” "Absolutely necessary" includes housing, food, clothing, and transportation. If the answer is “no”, do everything in your power to eliminate it. That means eliminating or reducing things that might be very close to “absolutely necessary” but not quite so.

So what do you cut first? Start with the big-ticket expenses:

Insurance is a great place to start. Most people over-insure themselves and their possessions, which means they are simply giving cash to insurance companies for no reason. By moving to a high-deductible or co-pay insurance plan, you can save significant amounts of cash, yet still have coverage for catastrophic events, and can switch back later if desired. Obviously, one must be sensible based on you or your family’s health needs. Do you have two or more policies that cover the same event? If so, canceling the redundant policies can save a significant amount of cash. This is particularly common with life insurance, as many employees buy into their employer’s life insurance plan as well as having their own family plan. Insurance companies are not required to pay if the victim or beneficiary has already been compensated by another insurer, so why have two policies covering the same risk?

Automobiles are another major area to look for cash savings. Eliminating one automobile from the average American family’s two or three cars can significantly reduce cash outflow. Many people will say, “but I will lose money by selling my car cheap” and they are correct. You will lose money. However, the goal here is to lose LESS money than you otherwise would had you not reduced the number and size of your cash payments. By selling a $40,000 car for $30,000, you take a $10,000 loss, but you also reduce your auto loan amount by $30,000. You can then either purchase a cheap car for basic transportation or use alternative transportation such as sharing the family cars and car-pooling. This is less convenient and prestigious, but is far more preferable to going bankrupt. There may also be a tax write off available as a “loss on the sale of assets” if you purchased the vehicle for business purposes.

Stop frequenting restaurants when you can eat more cheaply (and far more healthy) by cooking at home.

Stop shopping at malls and expensive brand-name stores and start buying from discount, outlet, and online retailers. Your teenagers will hate you, but this is much preferable to not having money for food to satiate their voracious appetites.

Telephone, cable, and Internet charges can be reduced or eliminated by switching to lower-priced plans or cutting out unnecessary features.

There are a plethora of ways you can save cash. Simply look around at all your monthly expenses and ask yourself "is this absolutely necessary?" Then focus on the big ticket items and you will get results!