Moves to make if you expect another economic storm
Trim debt now, and keep an eye on the horizon for inflation
Dear New Frugal You,
I'm doing OK, but I get more worried each time I flip on the TV. I see a struggling economy. Unsold homes and foreclosures. No jobs for people who are looking for work. Businesses and governments struggling, too. Now I read that we may even need to bail out Europe! What can the average person do? Is there anything that I should be doing now to prepare for an uncertain future? -- Average Joe
You're not alone. The Conference Board just reported that the Consumer Confidence Index plummeted in August. Only 12 percent think that business will improve over the next six months. Its CEO Confidence measure dropped 12 points in the report, too.
Clearly, many are concerned about the future. We see signs, but no one knows for sure what will happen. I liken it to preparing for a storm.
Here in Florida, we prepare for hurricanes. That means we plan for wind damage, we anticipate being without electricity for days, and we do what we can to prepare for those threats.
Some things we do routinely whether a storm is brewing or not. We keep our trees trimmed and during hurricane season, keep a healthy stock of canned food and bottled water. A lot of us have generators, too.
Then there are the things that we do when a storm is heading for us, such as filling our gas tanks and getting some extra cash, removing things that could become flying projectiles in high winds and putting up hurricane panels.
We may not know exactly how big the storm will be or how close it will come to us. It might even miss us all together. But it's much easier to handle a storm if you've prepared for it. In fact, if you don't prepare, the results could be catastrophic.
I'm sure you see where I'm going with this. There are potential financial storms on the horizon, too. They might fizzle out. Or, they could grow into major events that reshape our future. And like extreme weather events, it is much easier to weather the storm if you're prepared for it. You'll never be able to anticipate and have a solution for every problem, but the more answers you do have, the better life will be.
Let's begin by looking at some of the potential dangers. The first is obvious to everyone. There's a likelihood that more people will be unable to pay their debts.
The Mortgage Bankers Association said that nearly 13 percent of mortgages were 30 or more days past due. That's means every eighth house you pass has an owner in serious financial jeopardy.
The second threat is that there's more debt worldwide. The U.S. government owes over $14.7 trillion. Personal debt is another $16 trillion. Who knows how much debt European and other nations hold.
Preparing for these two threats is a little like getting ready for hurricane season. You might not be touched by the storm directly, but you want to prepare early.
What can you do? Put sound financial strategies in place. Control your spending. Pay off your debts -- especially credit cards or payday loans. Shed auto loans, too, if at all possible. Build up an emergency fund.
Why would you want to do that? Because so much worldwide debt could easily raise the cost of borrowing money. Too many borrowers will be chasing too few lenders. People with money will not only demand higher rates, but they'll also look for the most secure borrowers.
Those people who have many debts, especially debt with variable interest rates, will suffer. They'll see their rates go up. And those who have lower credit scores will face even higher rates. You don't want to be that person.
The long-range economic weather service is also picking up signs of a new storm. The threat of inflation could be the next financial hurricane. For the first time in years, significantly higher prices are affecting consumers. A trip to the grocery store or the gas station confirms it.
Today's higher prices could be just the beginning. Inflation is good for debtors. Especially big borrowers such as governments. That's because they get to repay their loans with less valuable dollars. So the temptation is to print more money.
While we don't know if the storm called inflation will develop into a full-fledged hurricane, there are some steps that you should take now.
- Be cautious buying bonds for long terms at fixed rates. Long-term bonds can lose 40 percent of their value if rates rise significantly, as happened in the 1980s.
- If possible, have some of your investments in real assets that will increase in value with inflation. It may be too late to buy gold, but other natural resources and real estate (assuming that it has bottomed out) could be a good choice for a portion of your invested dollars.
- Plan your budget so that you can adapt to higher prices. Don't spend every dollar you make. Leave some room in case groceries or gas suddenly cost 20 percent more. Now is not the time to fit an oversized house or car payment into your budget.
Joe, those of us who live in Florida often say that there's one good thing about hurricanes. Unlike tornadoes, a hurricane gives you warning so that you can prepare. Current financial weather reports show more than a few storm clouds on the horizon. You're wise to want to begin preparing now.
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