It’s gotten pretty bad out there. The market is down more year-to-date than it has ever been before (even during the Great Depression). The credit markets are frozen, despite worldwide efforts to add liquidity, lower interest rates, and prevent bank failures through government-sponsored buyouts.
What I’ve found interesting is the “Tips for Startups” coming from VC’s on how to survive this downturn. Om Malik has a great post highlighting Sequoia’s advice to its portfolio companies: What You Can Learn from Sequoia Capital’s Doomsday Plans
Most of these tips also apply to individuals trying to make it through:
- “Cut spending. Cut fat. Preserve Capital.” – Cut back on anything you don’t need. I love going to the Alley Theatre for plays, but I probably won’t be going anytime soon. This also goes along with:
- “Start with zero-based budgeting.” – Use online financial management tools like Mint and Wesabe to see exactly where your money is going, where you can save, and set budgets.
- “Reduce risk.” – This isn’t the time to be risking all your capital betting the market will turn around. Only invest with money you don’t need for 10-20 years. I bought some Russell 3000 (IWV) in my Roth IRA last week and it’s already down 20%. While I don’t like losing that much money, I don’t plan to need that for at least 40 years. I can take the short-term unrealized losses, as long as I’m not forced to realize them anytime soon.
- “Unprofitable companies would have tough time raising cash, so get cash flow positive as soon as possible.” – With frozen credit markets, consumers will have a hard time getting loans and credit cards. Make sure you’re cash flow positive; that is, spending less than you make each month. This is not the time to go into credit card debt, if you can help it. Interest rates will be much higher than they’ve been over the past 10 years.
- “On a scale between Capital Preservation and grabbing market share, he advised that everyone should be only preserving capital.” – For all you digital nomads out there (myself included), time to cut back on your travel/conference budget. It’s been fun flying to a conference every month, spending a ton of money in the name of drumming up more business (and catching up with friends along the way). But now it’s time to lower costs as much as possible; the lower your costs, the less work you need to survive. You can also save more of those earnings, which gets us to:
- “Make sure you have one year of cash.” – When the work doesn’t keep flowing in, you’ll need to live off savings for a while. Save as much as you can now, with a goal of having about 1 year’s worth of expenses in savings. Keep this out of the market, even out of money market funds for now (isn’t it amazing how many “cash-like” securities are no longer cash-like?). Your best bet is 3-6 month CD’s.
Do you have any other tips for individuals? Post them in the comments.