The Credit Crisis Survival Guide
The stock market and global economies are spiralling out of control. Banks are failing, people are worried about their finances, their job, and their house. Are you worried? Welcome to the Fool's 8 point credit crisis survival guide!
1. Relax
Take some deep breaths. Smell the autumn air. Large parts of the country are experiencing seasonably warm weather and bright sunshine. Enjoy it. Take your mind off the credit crisis and all things associated with it.
2. Don't panic
This is related to my first point. Fretting and panicking will not change anything.
It won't stop doubts about the health of the global banking system.
It won't necessarily stop stock markets going down.
You worrying about it won't stop the UK going into recession.
Any money you have lost on the stock market is gone. Worrying about it won't bring it back.
Your health is your number one priority. Don't let things outside of your control take control of you.
3. Prepare yourself for recession
You are witnessing history. We've seen nothing like this before in our lifetimes. 82 year-old former US Federal Reserve Chairman Alan Greenspan recently said "This is a once in a half century, probably once in a century type of event".
We're in for a couple of years of economic pain. The economy will retract. Unemployment will rise. Wage rises will be minimal. House prices will likely keep falling. Accept it, and start getting used to it.
It's definitely not the end of the world. We've had recessions before and we'll have recessions again. Every recession to date has been followed by periods of economic growth. This time won't be any different.
Getting your head around the reality of today will help you deal with the future. Living in the recent past, especially regarding the housing bubble and the excessive use of debt, is no use today.
4. Live within your financial means
If you are not doing it already, start living within your financial means. That means stop funding your lifestyle with debt. Stop living off your overdraft or your credit card. Make a plan to pay off your debt.
Start saving money.
Open a new savings account and see if you can put £50 in it each week. If £50 sounds a lot, just think of some of the ways you can stop spending money.that daily coffee at Starbucks, buying lunch every day, walk or ride to school, work and the shops rather than driving, one less night out a week etc.
Consider cancelling or deferring discretionary spend on things like a holiday abroad, the French annual skiing trip or big ticket items, like a new car, plasma TV and a new kitchen.
In short, live within your means, and save for your future.
5. Make your job indispensible
Just about every boss in the land will already be thinking about how they can cut costs, and that means employees like you and me.
The loafers will be the first to go. Don't be a loafer - if you lose this one, it will be very hard to get another job.
The thumb twiddlers will be the next to go. Instead of twiddling your thumbs, ask your boss what extra work you can take on. Even better, identify a task or role where you know you can add value to the company, and volunteer (with gusto) to take on that role, in addition to your regular job.
Finally, always stay friendly with your boss! (Ed - you're the best boss ever!)
6. Spread your savings
There are plenty of fearful stories here on the Motley Fool of people who've invested large amounts of money in failed Icelandic banks Kaupthing Edge and Icesave.
These people have been assured they will get their money back, but I can only imagine the pain, angst and stress they went though when the news first broke, and are likely still feeling today.
Fool colleague Cliff D'Arcy wrote this excellent article - Big Banks For Safe Savings. Check it out.
My advice is to spread your savings over a number of different savings accounts. That said, I don't expect any savings to be at risk in any UK-facing bank, as I expect the Government will effectively guarantee bank deposits all institutions.
But it's better to be safe than sorry.
7. Be patient
The stock market currently resembles a horror show. Shares across the globe are being sold off, many indiscriminately.
The markets are in a downward spiral they currently can't stop. Those people who use margin to trade shares are suddenly finding themselves having to sell to meet margin calls. Individuals are selling, to end the pain.
In the US, mutual funds investors withdrew US$72bn from US-managed stock and bond mutual funds in September. The first week of October saw an additional US$49.3bn of outflows. Hedge funds are facing the same issues - client redemptions.
As the market falls further, the redemptions increase, meaning more selling. The downward spiral keeps spiralling downward.
But it will stop. Value will eventually be rewarded. The share prices of high quality, growing companies will go up. Eventually.
Patience is required. It may not happen overnight. Be patient.
8. Be brave. Be bold
This stock market is a buy.
Not every stock and sector is a buy...
I would be steering clear of banks, because I don't think anyone can value them right now.
I would be steering clear of real estate stocks, because I think there is more pain to come regarding house prices.
Definitely steer clear of companies with high levels of debt.
But there are plenty of cheap, growing, cash-rich companies out there. Sure, they may not grow as much over the next couple of years, and their profits may even shrink, but on a 3 to 5 year view, they have the possibility of doubling, tripling and more.
If you are like me, and largely fully invested in the stock market, you'll have to sell if you want to buy. If you're also anything like me, you'll have some lower quality companies in your portfolio.
Bite the bullet, sell the crap, take the loss, and replace with cheap, quality shares.
[If you are feeling bold, how about checking out the Motley Fool's Champion Shares share tipping service. The first 30 days are absolutely free.]
In summary, these are trying times for us all, whether that be savers, investors, home owners, retirees.whatever. They will pass, and things will get better. In the meantime, it's time to get realistic and take all measures possible to survive these trying times.
Good luck!
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Comments
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Strebor19[br/]We're in a similar position. Have you thought about not buying a new car - they depreciate quickly during the first 1-3 years? I'd also have a look at Which Car to check out the mpg figures and reliability - some manufacturers' stats seem inflated and may not be a good basis on which to make a choice. We tend to keep our cars until they're 10+ years old, so the info on reliability is helpful. We think that by buying a nearly-new car we will end up saving money on running costs; we're going to use our car fund and borrow from ourselves to do this (bye bye new bathroom!) and use any leftover monthly cash to pay ourselves back over the next year. Other TMF discussion boards also provide info on negotiating with dealers on price and finance etc. [br/][br/]On the subject of the credit crunch/recession, I'm making more sure than ever to live within our means, and not to touch our savings buffer, just in case. I don't see what else I personally can do, so thank you TMF for the above article! My instinct would be (if I had any extra cash!) to buy incrementally into trackers particularly in the next 6-12 months and then re-evaluate. [br/][br/]We live in interesting times; yesterday I found myself trying to explain to my kids (4 and 6), in I hope a calm way, that when they grow up people will talk about the upheaval of this year and it'll be strange to them not to remember. Blank looks, of course! I wonder what it'll all look like in 10/20 years' time?
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To Strebor19, check your calculations carefully. I can't see how you could save £140 per month. The Fiesta would save you about £18.60 per month in fuel, and £12.76 per month on tax. This suggests that you are budgeting £110 per month on the extra insurance plus "surprise costs".[br/]Why not use your savings to buy a decent three year old diesel (if you want the cheapest road tax there are several models available, use Parkers.co.uk/cars/road-tax to check on any particular model) You should be saving at least £30 per month so if you can get a car for around £4000 then you are quids in.
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I drive and oldish car that is reliable and I owe no money on, which is good because it is not worth a lot. It is a 1.6 Rover 200 Cabriolet, Insurance Group 12, 34 Miles to the gallon £188 per year road fund Tax and I do 15000 miles a year. I have seen many new cars on the market at the moment which have a lot lower running costs like a 1.6TDCI Fiesta that would save me £140 per Month on running costs due to the lower insurance group, 67mpg and £35 Road tax + no MOT's new tyres or other possible surprise costs. Now I have worked I can use some of my savings and borrow the rest to buy a new car and still be better of each month due to the repayments being less than £140 per month, rather than throwing the money away in Basically Tax. It goes against the grain to borrow money for a Car and certainly goes against the general gist of this article but I seem to have found a situation where borrowing money will save me money ...any thoughts?
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14 October 2008