April 23, 2008

How To Prepare For A Possible Economic Depression

The signs are all around us. It seems like every day we hear more news telling us about the Difficult Financial Time we have ahead of us.

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 a Difficult Financial Time 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 this Difficult Financial Time. 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 protect yourself in this recession.

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 U.S. is actually negative, meaning that most of us borrow more than we make, but those who do well 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 amounts 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 10% 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 nest-egg if you don’t have one already. And even if you already have a financial nest-egg, 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 this Difficult Financial Time 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 system is in place today. If there was a serious run on the banks, and lots of people wanted their money, the banks would have to close down.

But remember, all banks aren’t the same. Some are safer than others.

Purchase Hard Assets

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 other necessities even in the case of hyperinflation and runs on the banks.

Cultivate Additional Streams of Income

We can never know exactly what’s going to happen during this Difficult Financial Time. 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 your company's performance.

It's important to protect yourself in this recession now, before it's too late.

For more detailed information on how to protect yourself in this recession visit www.SurviveRecession.com.

Filed under Saving Money by cureface

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