Possible Recession (or Maybe Depression) Ahead: How to Survive and Thrive in Hard Times
The “perfect economic storm” is coming. Are you ready?
The signs are all around us. It seems that every day we hear more news telling us about the tough economic times ahead. ace The nation magazine & CBS News correctly report: “The skies are darkening and sinister new considerations are intruding on the politics of 2008. The ailing economy, the backlog of foreclosures for homeowners, more multi-million dollar charge-offs by major banks, the fading of the dollar and stock market prices, oil prices approaching $100 a barrel: the list goes on, inviting a buzzword: the “perfect storm” stalking American prosperity.
Everything is happening at once. We have one:
- softening of the economy
- foreclosures
- Cancellations and bank failures
- falling dollar
- stock market crash
- Oil prices skyrocket
Yes, we have difficult times ahead. The Associated Press recently quoted Bill Gross, chief investment officer of PIMCO, the world’s largest bond fund, as saying, “We haven’t faced a recession like this since the Depression.”
The Depression? Are you serious? This is the CIO of the world’s largest bond fund. You must have some idea what you’re 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.
Well, what do we do?
When people find out that a big storm is coming, what do they usually do? They usually stock up on basic resources and “bail the hatches” at home. That’s exactly what you need to do first to prepare for the “perfect economic storm.” Before you do anything else, you must:
- Stock up on basic resources (saving as much money as possible), and
- Secure the hatches (securing your current assets and financial resources as much as possible).
Here are some tips to help you prepare for the Big Storm.
save money now
Save money like you’re stockpiling 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 earn, but it will be the savers who thrive in the tough economic times ahead.
This is easily accomplished now with direct deposit for paychecks and automatic debit of specific percentages of your paycheck into savings and investment accounts. (Check with your banking institution if you need help with this.)
If you can, be prepared to save 20% or more of your income, even if that means you have to tighten your belt a bit. This will allow you to build a good financial cushion if you don’t already have one. And even if you already have a financial cushion, who knows how long the hard times will last? Save as much as possible.
Reduce your debt load
The worst thing that can happen during tough economic times is that something happens to your income and you can no longer make your debt payments (mortgage, credit cards, etc.). Remember, history has shown us that a large number of layoffs are common during a recession (and even more so during a severe depression), so working your way out of debt may be one of the best preventative steps you can take.
Put your money in a safe place
Make sure where you decide to store your money is safe and secure. We are already seeing bank failures (eg NetBank and Bear Stearns), so make sure your bank is sound and properly insured.
During the Great Depression, many banks closed their doors and did not allow people to withdraw their funds. What was that for? Well, it’s a little known fact that banks don’t actually hold all of your money. For every dollar you deposit, banks can lend ten dollars using a legal practice known as fractional reserve banking. If you or I did this, it would be called fraud, but banks are legally allowed to do it.
This means that if even 10-20% of the people who have bank accounts really 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 dynamic is in play today. If there was a serious run on the banks, and most people wanted their money, the banks would have to close.
But remember, not all banks are the same. Some are safer than others.
Invest in Gold or Silver
If you’re interested in protecting your money against inflation and currency risk, you may want to look into investing in gold or silver. In times of high inflation, when the US dollar has lost value, periods of hard assets like gold and silver actually tend to increase in value.
Having some real gold and silver coins on hand at home (in a safe) can be a safe way to ensure that you and your family can buy groceries and necessities, even in the event of hyperinflation and bank runs.
Cultivate additional streams of income
We never know what is going to happen during tough economic times. But we can prepare for any eventuality. No matter how good you are at your job, if your business hits tough times, you may be forced to make some tough decisions and lay off employees. If you have additional streams of income, you should never fear. Don’t let your only source of income be your job. It makes you too dependent on external events.
In the age of network marketing and e-commerce, there are many ways to create additional streams of income. It depends on 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’s best for you and your particular financial situation.
