The “Perfect Economic Storm" is Coming. Are you ready?
The signs are all around us. It seems like every day we hear more news telling us about the hard economic times we have ahead of us. As The Nation magazine & CBS News correctly report, “The skies are darkening, and ominous new considerations are intruding on the politics of 2008. The softening economy, accumulating foreclosures for homeowners, more multibillion-dollar write-offs by major banks, the swooning dollar and stock market, oil prices approaching $100 a barrel - the list goes on, inviting a trendy cliché: the “perfect storm" stalking American prosperity. "
It's all happening at once. We have a:
- Softening economy
- Home foreclosures
- Bank write-offs and failures
- Falling dollar
- Falling stock-market
- Skyrocketing oil prices
Yes, we have tough times ahead of us. Recently, the Associated Press quoted Bill Gross, Chief Investment Officer of PIMCO, the world's biggest bond fund, as saying “We haven't faced a downturn like this since the Depression. "
The Depression? Is he serious? This is the CIO of the largest bond fund in the world. He must have some idea of what he is talking about.
If you saw how Bear Stearns, one of the largest Investment Banks in the US, basically went bankrupt and was sold for pennies on the dollar, you know how serious this crisis is.
Okay, What do we Do?
When people find out that a major storm is coming their way, what do they normally do? They usually stock up on basic resources and “batten down the hatches" at home. That's exactly what you should do first to prepare for the “perfect economic storm". Before you do anything else, you should:
- Stock up on basic resources (by saving as much money as possible), and
- Batten down the hatches (by securing your current financial assets and resources as much as possible).
Here are some tips to help you prepare for the Big Storm.
Save Money Now
Save money as if you were hoarding water, groceries and duct tape before a big hurricane. The average savings rate in the United States is actually negative, meaning that most of us borrow more than we make, but those who prosper in the tough economic times ahead will be the savers.
This is easily accomplished now with direct-deposit for paychecks and automatic debiting of specified percentages of your paycheck into savings and investment accounts. (Consult your banking institution if you need assistance with this).
If you can, set yourself up to save 20% or more of your income, even if this means that you have to tighten your belt a bit. This will allow you to build a nice financial cushion if you don't have one already. And even if you already have a financial cushion, who knows how long the lean times will be? Save as much as you possibly can.
Lower Your Debt Burden
The worst thing that can happen during difficult economic times is that something can happen to your income and you can no longer make the payments on your debt (mortgage, credit cards, etc. ). Remember, history has shown us that large numbers of layoffs are common during a recession (and even more during a strong depression), so working to get yourself out of debt can be one of the best preventative measures you could take.
Put Your Money Somewhere Safe
Make sure that wherever you decide to keep your money is safe and secure. We are already seeing bank failures (e. g. , NetBank and Bear Stearns), so make sure that your bank is properly solvent and insured.
During the Great Depression, many banks closed their doors and did not allow people to take out their funds. Why was that? Well, it's a little known fact that the banks do not actually have all of your money. For every dollar you deposit, the banks are allowed to lend out ten dollars using a legal practice known as fractional reserve banking. If you or I did this, it would be called fraud, but the banks are actually legally allowed to do this.
This means that if even 10 - 20% of the people who held bank accounts actually wanted their money, the banks would have to close, for fear of revealing that they just don't have the money. It happened during the Great Depression, and the same dynamics are at play today. If there was a serious run on the banks, and most people wanted their money, the banks would have to close down.
But remember, all banks aren't the same. Some are safer than others.
Invest in Gold or Silver
If you are interested in protecting your money against inflation and currency risk, you might want to investigate investing in gold or silver. In periods of high inflation, when the US Dollar has lost value, hard assets like gold and silver actually tend to increase in value.
Having some actual gold and silver coins on hand at home (in a safe) may be a secure way to make sure that you and your family are able to buy groceries and necessities even in the case of hyperinflation and runs on the banks.
Cultivate Additional Streams of Income
We never know what's going to happen during tough economic times. But we can prepare ourselves for any eventuality. No matter how great you may be at your job, if your company runs into hard times, it may be forced to make some tough decisions and lay off employees. If you have additional streams of income, you never have to fear. Don't let your only source of income be your job. It makes you too dependent on outside events.
In the days of Network Marketing and e-Commerce, there are lots of ways to create additional streams of income. It's up to you, your imagination, and your desire.
The Economic Storm is real. I suggest doing a lot of research and talking to experts to find out what is right for you and your particular financial situation.
David Richeson is the author of The Insider's Guide to Surviving the Recession . For over ten years, he has taught courses and seminars on various topics in personal development such as: money mastery, relationships, communication, motivation, overcoming fears, time-management, and how all of these issues may be improved through increased self-awareness. He completed his undergraduate study in Economics and Philosophy at Brown University, and is also the author of 360 Degree Success , a manual on finding true holistic success in life.