Wednesday, March 4, 2009

Recession and Revised Plans

Last year I posted about an extremely ambitious personal finance plan that my husband and I took on in July. We wanted to pay down the principle on our mortgage by an additional $50,000 - above and beyond the paydown we'd see with just our normal monthly payments - over the following 12 months.

Well, that was before it was generally known that the US had entered a recession in December of 2007. Despite the downturn in the economy, we did very well with our goal up until the beginning of 2009. We have not reached it, and as of January, we decided to change tactics and put that goal on hold. You see, right now it looks as though my husband will be out of a job at the end of June.

By any middle-class measure, he's very well compensated for what he does. But he works on a contract basis, and right now it looks somewhat unlikely that his contract will be renewed after June 30th. He had a job offer late last year that appealed to him, and which he intended to accept after June. But that offer evaporated along with the rest of the economy several weeks ago.

Having no debt other than our mortgage, and having built a cash emergency savings to cover six months of expenses, we're situated as well as can be expected to weather a period of unemployment for the main breadwinner in our household. I've been more diligent about doing the various things I do to earn money. And we can be fairly sure we won't go hungry any time soon, given the garden I have all planned out for this year. Still, it's a scary thing to contemplate: losing our income.

Right now we still have almost four months of continued income to count on, and that much time for him to look for other job opportunities, hustle for an extension of his contract, and hope that the economy recovers somewhat. In February I canceled the additional principle payments that we were making automatically each month along with our normal monthly payment. That money will buffer our cash savings for the next four months. If my husband finds another job by June, we'll be able to take that money and apply it to our mortgage as a lump sum payment. If not, well, we'll be using it for necessities.

My plan right now is to either refinance or recast our mortgage in early May if my husband has not secured another job. That will lower our required mortgage payment and let us live longer on our emergency fund. If our finances pick up again, nothing would prevent us from resuming automatic additional principle payments each month, though less of our required monthly payment would be applied to the principle. Still, if we lose our main income, that's a price worth paying.

On the other hand, we are also considering a major expenditure that's not, strictly speaking, a requirement. We've asked for estimates for a solar PV and solar thermal installation that would cut our heating bills down to almost nothing. I have no idea what those estimates are going to look like. Before we would pay out money for that, we'd also have our home evaluated for additional insulation needs.

This may sound paradoxical: that we're contemplating a significant discretionary expense when we anticipate the need to live on our savings. We see it this way though; if the economy remains so weak that my husband cannot find a decent job, we want to be able to heat our house next winter without spending much money. Heating is a major expense in our annual budget, and since we heat with oil, that expense is perilously tied to shrinking supplies of fossil fuel. I'm also concerned about the possibility of hyper-inflation. If that occurred, not only would the value of our cash savings be less, but the cost of oil and electricity might easily become prohibitively expensive. Finally, we reckon that a home with solar electricity generation and low heating costs will hold its value better than many other homes. In other words, it looks like a smart investment to us right now.

We've yet to see the estimates for such an installation, so we don't know whether we'll take that plunge. But it's on the table. And if the price is right we may be able to pay for it with a bonus we're expecting based on last year's performance by the company my husband works for. (For the record, that company is not in the financial/banking sector, nor anywhere near it.)

The smaller amounts of money from my earnings that were occasionally applied to our principle are also accumulating rather than being paid out. But part of these funds are being set aside in my mind for spending as well. Mind you, I'm not planning on any frivolous purchases, but I would like to invest in some items that will be of long-term value to us, no matter what happens with the economy. I figure some responsible spending won't be amiss in these tough times either. On my list of things to buy are some extra sets of long underwear for both of us during the coming spring sales, a solar oven, some solar lanterns, and some materials to build housing for some meat rabbits, and to modify our mobile chicken coop this spring. If there's money left after that, I'll buy another 50-pound bag of bread flour, though I'm almost afraid to know what the price has risen to. Basically, I'm looking to put about $500 into things that will hold their value and pay dividends for our budget year after year.

If we are somehow able to squeak through this year without a loss of income - and that's a big if - I would like to start another savings fund for an electric assist bicycle. I understand that these are quite expensive. But I know that sooner or later we are going to have to confront the end of affordable gasoline. A bicycle was my transportation for many years out of necessity, and therefore I've never regarded cycling as recreation, as my husband does. We live in a quite hilly area, and it's more than three miles to reach the nearest spot where we could grocery shop or fill a prescription. The bulk food store is 17 miles away along the flattest route. There is very, very little public transportation in our area, and none right now that would get us to the places we shop. It would be faster for me to walk to the nearest grocery store than to take a bus, and I'd still have to walk most of the route anyway. So far, an electric assist bike is the best transportation solution I've been able to think of to the end of cheap petroleum, and it wouldn't be much fun, or even manageable, on many winter days.

Well, that's where we're at in this recession. I'm not feeling sorry for us; I know we're better situated than many. Still, like everyone else, we are feeling the anxiety. My heart really goes out to those who are already dealing with job losses and financial disaster. If you're not yet in crisis, please think about spending wisely where you are able to do so. Remember that food banks and other charities are stretched incredibly thin right now. If you can afford it, check that box to add a few dollars to your utility bill payment to keep someone else's electricity from being shut off. Plant your garden this year, and share what you can. We're in for more tough times ahead.


Lily Girl said...

I recently found your blog and am very much enjoying it!

I'm sorry to hear about your husband's job, that uncertainty is stressful, but you guys are definitely in a much better position than most Americans.

I also wanted to thank you for the colcannon recipe. I'd never heard of it before, but I made a version last night and it was really good and used up some of the produce from my CSA that needed using.

I just had a question/suggestion with regard to the 50lb flour sack you are planning on. Have you considered purchasing a grain mill and then purchasing whole wheat berries and grinding as needed? They are usually less expensive than the equivalent weight in ground flour and they keep much longer in storage. A high quality mill is not inexpensive, but should provide years of service. That is my plan eventually, when I have the space to store that kind of volume. I am just curious what you think.

Thanks for a great blog!

Anonymous said...

Sorry I haven't commented before, but I really appreciated the colcannon recipe too! And I'm Irish Canadian, we eat lots of potatoes in this house!!

Sounds like you have your financial house in order to get through this ecomomic calamity.

In our small town the hot seller for transportation is the electric scooter. It's pretty popular in the summer, and its quite a site to see big army guys in fatigues going to work on them!Gas prices here in Canada were outrageous last summer, so everyone started looking at options.

I really enjoy your blog.

Anonymous said...

Another new colcannon fan here.

We find that our PV system saves us about $100/month (located in southern California).

My hubby is currently well employed, and no likely end date, but my current project is building meat rabbit hutches as well. You just never know. I wanted to pay off our mortgage early, but we realize that our rate was so low, and the tax write-off good enough, that it made more sense to save a larger cash reserve for emergencies. Of course, now that money is in a bank with some serious problems, so you really just never know.

It's me said...

I WISH I were as organized as you, whether you even think you are or not!

But... I'm moving forward. And that's better than standing in one place I suppose.

Good luck on husband's job. I hope it holds.

Anonymous said...

I think it is great you are getting yourself prepared...We have been cutting way back and trying to save which is the hard part.

We do have a bit of money put back but we have been dipping into it.

I don't think things are going to get any easier anytime real soon.

Great Post!!


Ace said...

My only concern with your large purchase is this (and hey, it isn't like you asked LOL)...IF you lose your income AND you only have a certain amount of savings to live off of...there is always the possibility that you will lose your house (just thinking worse case scenario). Is this new solar thing portable? Do you have a back up for if you do not replace that income?

A lot of preppers are prepping to lose their houses (even if they are able to handle their finances for quite awhile). Some are putting their money into rvs with solar options.

I have no idea if this is a good idea for someone like you or not, but maybe it would be an idea to put money into a depression proof busines or money on land that you can buy for cash or something. I just don't know how many are going to be able to carry mortgages for YEARS of a rough economy.

I would also, just me here, bump up purchases of food. It looks like that is what is going to go way up first.

Anyhoo. I hope this doesnt offend, just participating. Thanks for sharing it really helps me to flesh out my plans.

Many Blessings :)

Anonymous said...

I really enjoy your blog and your post today I could so identify with. My husband just made the cut for a round of layoffs at his work place but they will not be the last. We are going to start living off one salary and bank the other to get ready for what most likely will happen at some point.
I work for a design/build firm and have been learning quite a bit this year about the steps one should take to prepare for higher oil prices, shortages etc. I was glad to see you mention insulation as an important factor. Before you make any commitment to solar you should make sure your home is insulated to the max. Until that is done you really do not know how much heat you need to provide to stay comfortable. You may find that once you have insulated as much as possible another solution for heating may be cheaper or better. Do some google investigation on deep energy retrofit, passive house, building science, alternative heating sources etc. before you make such a big commitment. Also check out energy credits and rebates in your state. Good luck, I look forward to reading your posts, I also loved the colcannon recipe and made it last week. Karen from CT

Anonymous said...

That is so great that last year, you and your husband sat down and made a plan and goal to pay down your mortgage! If you did have to refinance this year, you'll have a much lower principal to finance. Plus, just the great feeling of knowing that you are that much closer to being debt free!

I hope that your husband can extend his contact at work. This economy is getting worse by the minute.... I have even heard the mainstream media say that it looked like we were headed into a "minor" depression.... This is really scarey.

We also have a nice garden and we can grow much of our own vegetables. My family is working toward sustainability. I've now added 12 chickens (pullets) and we are building a coop and run for them now. They are chicks right now, 2 weeks old.

I believe everyone is going to have to go back to the Earth, begin to raise and grow their own food. We're going through a rough time with our economy and I only believe it will get worse before it gets any better. We have to be prepared.

Kudos to you and your husband for being organized and prepared!

Kate said...

Well, gosh! Who would ever have predicted that the colcannon would be such a hit? Thanks to all of you for the good wishes. I'm trying to remain optimistic, but I know that the chances of the economy turning around in the next few months are slim. I wish all of you the best in these tough times as well.

Lily Girl, my husband actually recently purchased a grain mill for his homebrewing needs. I have not yet used it since I have two 50# bags of flour - one of bread flour and the other all purpose. I definitely recognize the storage virtues of whole grains, and I plan to store spelt and wheat berries. But I am not accustomed to baking with whole wheat. Right now I am using a "2/3" wheat flour, which include the endosperm and the germ, but not the bran. I need to learn to work with whole wheat, obviously. It's on the list!

Anon1, I sold a gas powered scooter last year because it was costing a fortune in insurance and I hardly ever used it. I think a bicycle is a better long term solution, and with a trailer, I could actually transport more with a bike than I ever could on the scooter.

Jessica, our electricity bill is much lower than that, but then we heat with oil. If we add in the cost of oil to our electric bill, our power costs, on average $165 or so per month. We'd love to get that down to less than $25 if we could. We'll see what the estimates look like.

Meadow Lark, whatever it is in me that you perceive as organization is much more likely to be pure terror channeled into some - any kind of - action. I just try to go slowly enough that I'm not doing something stupid in a blind panic.

Renee, yes, saving is always a challenge. I think you're right about this being a long slog for all of us through very difficult times.

Ace, no, I didn't ask, but that's alright. I suspect that we could liquidate long term investments if we absolutely had to in order to pay off the mortgage. If it had been up to me, we would have simply done that to buy our home outright in the first place. But you know how it is in a partnership. I have slowly been building up our food stores and will continue to do so.

Karen, yes, insulation is one of those "anyway" things. A lot of the preparation I'm pursuing is stuff that we should all be doing - stuff we should have long since done - "anyway." We'll definitely have the efficiency of our home evaluated and addressed if need be, before we lay out cash for any solar installation. I suspect however that our house is well above average in that regard. We'll see.

Judy, I am glad that we've been pursuing and aggressive debt reduction plan for a while now, and that we're fairly practiced at frugality and gardening. It's odd. I feel like someone who got the news 15 minutes ahead of everyone else. What I've been trying to do for the last couple years is starting to look less and less eccentric to people around me. I agree that we must all prepare ourselves rather than waiting for technology or the government to step in and save us from ourselves.


Freija and Beringian Fritillary said...

Hello, new to your blog too. It's great to read about your level-headed preparation and plans. We still look eccentric to our neighbors, but not really crazy anymore! It does not sound like a contradiction to invest in things that will ultimately reduce your monthly bill. That's our general approach, and heating is a big one. We run on a solar panel, with a gas generator when there's no sun. Depending on how much sun you get in your area, it can have a mediocre payback. But solar hot water can be done most anywhere. We will be interested to see the estimates that come back.

We use bicycles as transport year round, and we have some pretty long winters. We pick our days. If you are organized, there is bound to be one or two days a week that are bikeable, avoiding snow/rain and heavy wind. And a trailer is a great way to transport groceries etc. We are looking into an electric motor assist for the bikes as well, so we can go longer with more weight. Here's a great blog on bikes as transport
and with kids
Personally, I would rather be on a bike, pedaling and keeping warm, than on a scooter or motorcycle freezing my buns. We bike comfortably as low as -20C, dressed properly.

And on the flour issue, it's interesting but It seems that everywhere I have looked recently, whole wheat berries are the same price as whole wheat flour, bread flour being a bit higher. We grind our own wheat, and baking with whole wheat is definately different, we have gotten to love it, but I had to start from stratch with my own bread recipe.

Looking forward to reading more. Take care.

Kate said...

F&B, thanks for your thoughtful comment. Isn't sort of funny but also nice when the times change and make you look less crazy? I think we could manage on bicycles year round if we had to. We just wouldn't go out much in winter, which would be just fine by me. I'm a homebody anyway. But yes, we would definitely need to pick our days.

We're still trying to work out the details of what sort of solar installation we wan to price. It's been slow going, but I'll post about it some more when things become clearer.