Concerned about how a business downturn will affect your personal finances? Here are some steps that may help you withstand an oncoming recession as well as any future recessions.

Chapter one of Financial Abundance Guide is entitled “Spend Less Than You Earn.” While this concept appears obvious, many people suffering from personal financial setbacks do not follow this simple precept.

Determine your current financial health

First, prepare an annual budget. For your estimated monthly expenses, track your expenditures for three months. Be sure to include federal, state and FICA taxes. To your estimated monthly expenses add quarterly, semiannual or yearly expenses, such as home and auto insurance, vacations and property taxes. The sum is an estimate of your annual expenses.


Determine your annual “non-retirement income.”

This is your total income less any contributions made to 401(k) plans, IRAs or other retirement accounts. Non-retirement income less annual expenses is the amount of savings that you have available to recession-proof your life.

Ideally, this savings will be at least 10 percent of your non-retirement income. If not, identify some “nice to have” expenses that can be eliminated — like that morning café mocha which can cost over $1,000 per year. In 20 years, with a 5 percent investment return, removing the mocha would provide you with $35,710.

Wipe out any credit card debt

Use savings to pay down one of the most expensive forms of debt available. If you have good credit and equity in your home, consider a home equity line of credit. Use this line to pay off your credit card debt and then pay off your home equity line as quickly as possible.

Get an “emergency fund.”

An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. With an emergency fund in place, you can survive a business downturn, job loss or short- term disability without invading your retirement accounts.

Spend that government rebate wisely

If you receive the $600 per person federal tax rebate, use it to pay off credit card debt, increase your emergency fund or to save for educational or retirement expenses. This income can be your first step in recession proofing your life.

Once your credit card debt is eliminated and your emergency fund is in place, use your savings to buy your first house, pay for your children’s education or to better insure an abundant retirement.

When saving for your first house, consider a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of income plus all of your Roth contributions for a down payment on your first house.

If you are saving for your child’s education, consider funding Coverdell Education Savings Plans and Section 529 College Savings Plans. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.

Most retirement plans provide an immediate tax deduction of the amount contributed and tax free growth of the plan’s funds. If your employer provides matching funds to your retirement plan contribution, always contribute the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee a high rate of return on your investments.

By following these simple, powerful steps you can achieve financial security. If you do not feel that you can take these steps by yourself, find a knowledgeable and trustworthy financial planner to help you with this journey. While lowering your current spending may cause some short term financial discomfort, the payoff of recession-proofing your life is a reduction of fear and stress.

I recently read an article by Henry K. (“Bud”) Hebeler at Bankrate.com. Bud, the former President of Boeing Aerospace, has spent his retirement years helping people prepare for retirement. His popular web site, analyzenow.com, has many helpful retirement tools. Bud was also kind enough to provide a technical edit of my book, before it was published, as well as to write my book’s Foreword.

In his article, Bud shows that the personal savings rates in the US have deteriorated from 10% in 1985 to 5% in 1990 to 2.5% in 2000 to 0 today. Personal savings rates today are the same as they were from 1929 through 1931, after the stock market crash that led to the great depression.

As savings rates have receded, personal consumption has climbed. In inflation adjusted dollars, consumption per capita in the US has climbed 25% from 1985 to today. From these figures, it is easy to see why the average American now saves nothing, compared to a 10% savings rate in 1985.

What you may not realize is why this has occurred. We all know that, until recently, credit was extremely easy to get. Credit cards, interest only mortgages, home equity loans and car loans helped transform us into a society of debtors instead of savers.

Since the vast majority of our GDP now comes from consumerism, US industry wants you to spend. Our financial institutions make significant profits from credit card interest and other forms of personal indebtedness. Even the government encourages spending over savings by providing tax deductions for mortgage interest while taxing savings interest at the same rate as earned income. State and local governments get much of their income from sales taxes that are placed on the goods and services that you buy.

Our President once said that we are addicted to oil. I would take that a step further and say we are addicted to consuming. Look at how often the media refers to you as a “consumer “ and see if you ever see the US population called savers.

If you have an addiction to consumption, now is the time to break it. As I often recommend, when you get your pay check, pay your self first by saving a portion of your paycheck. If, at age 30, you save $50 per week, with a 7% investment return, that $50 payment will be worth almost $400,000 when you are age 65.

As your pay increases, increase your saving amount until you are “paying yourself” at least 10% of your take home pay. By paying yourself first, you will have adequate resources to live an abundant retirement. This approach will also help you overcome the “consumption addiction” that industry, financial institutions and the government are all hoping that you will never break.

In the next few days you may be receiving a tax “rebate.” How are you going to spend it?

While our elected officials want you to go out and spend your rebate to help “stimulate” the economy, you might want to use it to begin to recession proof your life for the present as well as future recessions. If you would like to begin approaching life from abundance instead of scarcity, here are some possible ways to “spend” your rebate.

1. Use it to pay off your credit card debt, one of the most expensive forms of debt available.

2. Begin funding your “emergency fund.” An emergency fund is a highly liquid account which provides coverage for between six months to one year of your current expenditures. This fund will allow you to survive a business downturn, job loss or short- term disability without invading your retirement accounts.

3. If you are saving for a first house, use it to fund a Roth IRA. Even if you have a company retirement plan, you can contribute up to $5,000 annually to a Roth IRA, if you are single and earn less than $101,000 or earn less than $159,000 if you file taxes jointly. Once your Roth IRA has been established for five years, you pay no taxes when withdrawing up to $10,000 of Roth income plus all of your Roth contributions for a down payment on your first house.

4. If your employer provides matching funds to your company retirement plan contribution, use it to contribute up to the maximum amount that your employer matches. The matching funds are “free money” that virtually guarantee you a high rate of return.

5. If you have children that will one day go to college, use it to fund a Coverdell Education Savings Plans or a Section 529 College Savings Plan. With both plans, the invested funds will grow tax free and can be withdrawn tax free when used for educational expenses.

6. Invest it in either an IRA or Roth IRA for retirement. In future posts, I will demonstrate how you can never have too much for retirement.

You have probably heard the expression “use it or lose it.” If you spend the rebate buying another “thing” you will lose it. If you put it to work for you in one of the ways listed above, you will use it now and in the future.

Yesterday was the deadline to pay your 2007 taxes. If you are like most people, you probably feel that you paid too much. If so, now is the time to identify ways to lower your 2008 taxes. Every dollar of reduced taxes can be used to help fund educational or retirement expenses.

In Financial Abundance Guide I devote almost 100 pages to strategies for reducing your taxes. To demonstrate that I “eat my own cooking,” I will describe the approaches to tax reduction that my wife and I used in 2007. In parentheses I will put the page of my book on which the referenced strategy can be found.

1. In spite of receiving significant long term capital gains in 2007, we reported gains of less than $1,000 on our tax return. This was accomplished by keeping most of our equity holdings in our IRA or Roth IRA retirement accounts (pages 125 -126).

2. We were able to deduct $7,250 by fully funding our Health Savings Accounts (HSAs) in 2007. Since my wife and I are both over age 55, by setting up separate HSAs, we could each deduct an additional $800 over the normal family deduction of $5,650 (pages 63-66). In 2008, we will be able to contribute (and deduct) a total of $7,600 into our HSAs.

3. Thanks to the expenses involved in writing, publishing and marketing my book in 2007, I had virtually no earned income. However, my wife had more than adequate income to allow for me to fund my IRA as a “spousal IRA” and receive a deduction of $5,000 (page 44-45). Since our AGI was under $159,000 my wife contributed $5,000 to a Roth IRA, even though she was covered by a company sponsored retirement plan (pages 46-47).

4. Our itemized deductions included a $10,000 gift to our “Donor Advised Fund” charitable giving account (pages 81-83). This was a gift of highly appreciated stock that we bought for $4,000 in 1999. By giving the stock to our charitable fund, the $6,000 capital gain was completely tax free, saving us from paying $900 in capital gains taxes (page 80-81).

5. Our daughter, in her third year of college, had tuition bills exceeding $8,000 in 2007. Thanks to the Lifetime Learning Credit, we received a $1,600 tax credit against actual taxes owed (page 38-39).

6. After all deductions and credits, our tax bill would have been $0. Knowing this was likely, I ran a pro forma tax return in early December. I determined that we could convert a significant amount of our IRA savings into a Roth IRA, and pay very little in taxes (pages 48-50). In December 2007, we converted $55,000 of IRA funds to Roth IRA funds. The total tax bill for this conversion was $2,605 for an effective tax rate of 4.7%. These funds can grow on a tax free basis for as long as we live. If we are able to leave an inheritance for our children, inherited Roth funds can continue to grow tax free for our children (page 176-177).

Minimize your taxes is Step 3 of the 7 Steps to Financial Abundance. As I have demonstrated, active tax management can substantially increase your financial abundance. The next time that you are trying to maximize you investment returns, take a few minutes to consider methods of minimizing your taxes. The time spent may provide an “investment return” that far exceeds your expectations.

Politicians, both Democrat and Republican continue to talk about the need to provide affordable health care for all Americans. However, by preparing your 2007 tax return and using Schedule A to itemize deductions, you get a first hand opportunity to witness the hypocrisy of our political class.

If politicians really wanted to reduce health care costs, their first act would be to remove the 7.5% of AGI deduction penalty for health care expenses. If you are married and your combined Adjusted Gross Income (AGI) is $100,000, your first $7,500 in medical expenses is not deductible from your taxes. Assuming that you are in the 25% federal tax bracket and pay a 5% state income tax rate, this “health care penalty” will cost you $2,250 in additional taxes. Eliminating this penalty would provide a 30% reduction in health care costs.

The political hypocrisy is even more evident when you consider that all of the mortgage interest that you pay for your house is deductible, but you cannot deduct most, if not all of your health care costs. If you agree that health care costs should get as least as favorable tax treatment as home mortgage costs, join me in contacting your representative to congress and your senators.

If politicians really want more affordable health care, they could easily take the first step by eliminating the “health care penalty” in our tax code.