In times of financial uncertainty, follow timeless advice
By Sally Herigstad | Published: October 3, 2008
To Her Credit
Dear To Her Credit,
I was discussing the banking crisis with my husband and he said, "Ask somebody that knows more about those things than I do." So I am. I'd love to hear your frank opinion.
My 401(k) plan is diversified and managed. And, of course, down in value. I could move it all to a 2.75 percent interest "safe" account. With what's going on the in market, do you think I should do that? (If "the sky falls,"it will all be worthless anyway.)
In case of a total banking collapse, will we be able to get our cash out? Will we still have credit? What can we do to protect ourselves? I read some "alarmist" stuff about stocking up on food and cash because some people predict the economy will collapse within the next month. Should we keep large amounts of cash on hand? (We all know if everybody wants their money, we can create a self-fulfilling prophecy of collapse.) Thanks. -- Anne
I've been hearing from many people who are worried about the current banking crisis. We have good reason to worry. However, I believe the problem is being overhyped. The alarmists are out again. Some of them are scaring people to death. I've even heard people say that they think they'll lose their savings, their retirement, their jobs and their homes. Not so fast.
Remember, this isn't the first big tab the government has picked up and it won't be the last. If we had read a couple of weeks ago that a huge bank was failing and the government was spending some incomprehensible amount of money fixing the problem, and then that was all we heard, how many of us would be in a panic? We'd think: There goes our government further into debt. Not good, but not the end of the world. We're mostly panicking because some journalists and politicians are telling us we should. The sky isn't falling.
What is likely to happen in a major banking crisis such as this one?
History shows that even in severe banking crises, we can still buy, sell, and go about our lives. The banks will still cash checks. You'll still get credit card offers in the mail -- and probably will until the end of the world. Most people will still have jobs. Any changes in the economy won't happen overnight. In the Great Depression, it took years for many of the effects to be felt. (And remember, the Great Depression was the result of many factors, including drought, in addition to the stock market crash.)
Nobody knows what will happen this time. Realistically, we could face difficulty getting credit or very high interest rates. Recession is a possibility, with unemployment and stagnant or dropping home prices. The value of our investments can go down, at the same time that inflation makes our money worth less.
So what should we do? The same things we should have always been doing:
- Pay off consumer debt. Credit card accounts are tools; they should not be considered long-term loans. Rising interest rates could hurt you if you carry a balance.
- Get a fixed-rate home mortgage unless you plan to be in your home less than a few years.
- Keep an emergency fund. This can be in money market funds, savings, unused credit, or other liquid assets.
- Have Plans B, C, and possibly D for employment. Everyone should have more than one way they can make a living. Keep your skills up and your options open.
- Protect yourself from inflation. This is simple in theory: Put your money in things that have intrinsic value regardless of what happens to the dollar. For example, a can of beans has the same intrinsic value no matter what happens to the money supply. A supply of tools can still fix things. A house is still a place to live. In fact, real estate is the classic hedge against inflation. Another easy way to protect yourself from inflation is I bonds. These U.S. bonds are indexed to inflation, so if we have high inflation, you're safe.
- Allocate your investments to minimize risk. No one can tell you what individual investments to make without seeing your complete financial picture. If you need help, see a professional adviser.
- Do whatever it takes to make you feel secure. If you feel better with $500 cash at all times, then keep that much with you. If an investment makes you nervous, you shouldn't be in it. If you really want your house paid off, work on that.
I don't recommend stashing very large sums of cash in your house. Not only could it get stolen, but it's not working for you stuffed under the mattress. You could at least use it to decrease your high interest debts.
Remember Y2K? Some of us felt a little silly a couple of weeks into the year 2000 with our cash stashes and our supplies of water and toilet paper. But it turned out to be not such a bad idea to have more essentials on hand, to be a bit more prepared for whatever comes.The same is true today. We all need to get our finances in order. That's the best advice in good times or bad.
See related: Crisis survival tips: Pay off debt, cut credit card spending, What happens to your card debt if a bank fails?, Will cash become king again?
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