You can take action now to survive what could be a perfect storm of financial destruction…a depression in the making. It is not so far fetched that the United States could experience the worst economic recession since the 1930s.
What is especially worrying is that US government debt is already over $2 trillion for the first time in history. It will no doubt come up with the legislation that Congress is considering to deal with the crisis. At some point, citizens could lose trust in the government if the debt grows too high or is spent recklessly. Then companies and individuals will seriously cut spending in a society based on mindless consumption. The United States could be caught in a self-reinforcing downward spiral toward an economic depression.
In the wake of a financial depression, the name of the game is survival. Cash and credit are king. You will have to reduce your expenses to the extreme. Expect the situation to last four or five years like that, plan for the worst case scenario. What you can do to prepare is to act quickly before you are in a bind:
Downsize Your Life: The average home size in America has been oversized. In the 1970s, a quarter of new homes were less than 1,200 square feet, today only 4 percent are. Do you use your whole house? Consider selling your home and sizing it right. Buy a foreclosure or fix up top in an up and coming neighborhood. Keep the extra money in a well-managed bank. Some banks are offering interest rates above 3 percent, which is much, but safer than losing your retirement in mutual funds or stocks. Dump that SUV or truck you use to commute and buy a used hybrid compact car and get 45 miles per gallon. Find the best price on carsdirect and receive it from anywhere. As a point of reference cut expenses by 25%. Write down your current household budget and start cutting back. Do you really need to go to Starbucks twice a day at $3 a drink? You will find that the little things really add up.
Go Green – It’s a great way to improve the quality of your life on a budget. Conserve water by delaying your sprinkler timer, taking shorter showers, and installing low-flow toilets. Plant a robust garden. Save electricity by installing a solar water heater, compact fluorescent lights, and energy-efficient appliances when the old ones wear out. Lower the thermostat in winter and raise it in summer. Recycle everything and consider buying gently used clothing and furniture. Consolidate electronic devices in the home. You can buy and sell almost anything on Craigslist and eBay. Work in the green collar workforce part or full time in sustainable energy or conservation. Start a business at home as an eco-entrepreneur.
Optimize credit: If the interest rate on your home mortgage is a couple of percent above prevailing rates, consider refinancing. Many banks still offer home equity lines of credit at favorable rates. They are currently around 4.5-5% and a lot without fees unlike home loans. Apply for quality, low-interest credit like the Nordstrom Visa Card while you can. Carefully read the terms of your credit card. Zero interest balance transfer offers on some cards come with a catch. If you use that card for purchases, the interest could be over 20 percent! Interest rates and credit limits may change. Use the equity line to pay off high-interest rate balances and auto loans, if you have them. If you run a deficit every month after cutting spending, credit can provide a cushion. Don’t wait and apply when you need credit because even with excellent credit you may not get it.
Bargain Basement: In the depths of the looming depression, those lucky enough to have cash and credit will prosper. Stocks and housing will be at bargain prices. Dare I say 20 percent cheaper. Outsmart Warren Buffet and buy some shares in companies with good balance sheets and brands with historically low valuations. Become a real estate tycoon by snatching up a distressed property. How do you know when we’re at the bottom? Look at the major economic promises falling short of the worst recession since the Great Depression, which would be the 1980-81 recession. Also watch out for capitulation from Wall Street darlings like Google. Be patient the storm will pass. With the help of smart deficit spending, lower interest rates, and a new administration, things will gradually improve.