This is the second part of a three-part series. Part I can be found here. Part III will deal with long-term investment strategies and policymaking.
UPDATED DISCLAIMER: As I noted before, these are just my thoughts are ARE DEFINITELY NOT financial advice that you should take without first talking to a financial advisor. Please do your own research before doing (or not doing) anything I mention. Also, I am NOT advocating a run on any banks!!
So let’s say you have a savings account at Washington Mutual….
The world is collapsing all about us. Unless we switch to the Gold Standard as the Founders and Joseph Smith intended, all is lost! Invest in cracked wheat and ammunition FAST!!!!!!!
Here are some broad suggestions for those concerned about the recent crisis. In honor of Talk Like a Pirate Day, some of my thoughts will be more swarthy than others.
1. Arrrrrr, don’t panic, ye scurvy knaves. Your anxiety will not solve the global financial crisis, nor will it help you or your family. Indeed, panicking is the reaction most likely to cause you to make poor financial decisions. For now the average consumer has been largely unaffected by the actions on Wall Street (eerily so). So try to relax. Go for a run. Watch Ratatouille.
2. Don’t make yer boss walk ye on yon plank. Your best income-generating source is most likely your job (or, for students, your job prospects upon graduation), and is likely to be your greatest financial asset over time. Don’t do anything to jeopardize your job. Take on additional projects, take seminars or other programs to increase your utility, and continue to work on your networks in case things should go awry.
3. Avast! Don’t throw your gold away on rum! Now (as in today) you should take serious stock of your assets and your liabilities. Chart out your bank accounts, investments, loans, mortgages, and sources of income. Literally chart it all out. Get the total financial picture. Then map out, based on your prior bank statements, your average monthly spending and the key areas where your spending is the highest. Now (as in today), identify unnecessary and frivolous spending (entertainment — including cable — and dining out are typically the two biggest villains), think about a budget, and start living well within your means. When I was in law school the financial aid department was fond of saying, “if you live like a lawyer when you are a student, you’ll end up living like a student when you’re a lawyer.” Those incremental and unnecessary expenses make all the difference. But to approach them, you must first identify them and have a full awareness of your state.
4. Keep yer bullion in more than one treasure chest, me hearties. The importance of diversification is one of the most important lessons we can draw from the collapse of Lehman Brothers. Even though the market is pretty brutal, don’t stop investing altogether — just be sure not to put all your eggs into one narrow portfolio (such as investing everything into your employer’s stock). 401(k)s are particularly good investments to be making right now. You won’t see a lot of short-term gains but getting into the market at the low point is a great, great thing. Remember “buy low, sell high”? Well, things are low right now.
5. Always keep some treasure hidden away, in case Davy Jones comes for ye! Expand your emergency fund. Cut back on frivolous spending (Comcast is probably getting thousands of dollars a year from you), and put it into a financial cushion that you can have handy in case of a layoff or other emergency. Every day we see tales of average middle class people who find themselves impoverished because of sudden medical bills or losing their jobs. Don’t let that happen to you — scrimp now and pat yourself on the back later.
Now a few more specific questions:
–Should I move my savings account? It depends. If this is your sole savings account and you regularly turn to it and depend upon having unrestricted access to it, you might consider moving it. Most bank accounts are FDIC-insured, so the concern is not losing your money; but the FDIC will not kick in immediately, and if your bank really does go under suddenly, there may be weeks where your funds are not accessible. Otherwise, there’s no reason to do anything and it will certainly lower your stress level to just keep things as they are.
–Should I buy a house? Hmmm. I do not believe that we have hit bottom in the housing market, certainly not nationwide. Some markets have corrected more than others, and may see a rebound — but it’s hard to say for sure. But housing prices are not the sole concern in buying right now; you also need to think about mortgage rates and accessibility. The 5% no-money-down instant mortgage of 2002 is gone — now try to get even an 8% mortgage, and heaven help ye if you need a jumbo loan. If you have the magic combination of a good mortgage rate locked-in and a deal on a house, I wouldn’t hesitate…. but that is an increasingly unlikely scenario. This is a great time to rent.
–YES, both husband and wife need to be involved in the financials. It is irresponsible and plain stupid for one half of a couple not to be completely informed as to where the money is coming from and where it is going. Each person should know where all the bank accounts are and what does what. If you don’t know the ins-and-outs of your finances, correcting that situation immediately should be your number one priority. Seriously.
–I just saw this test online, which I think is really good. Want to know if you can weather the financial storm? Here’s what one financial advisor does:
She asks [clients] to calculate their monthly expenses — from Botox shots to country club fees — and their monthly income from work and investments. Then she has them cut 10 or 20 percent off the income figure. If they can still afford their lifestyle, she tells them that they have enough of a cushion to protect them from a troubled economy.
–Also, here is a good, official site for people really worried about the FDIC and its impact on their deposits.