As you well know by now I am a big advocate of being financially liquid. Too often people find themselves in dire financial straights trying to payoff the huge debt of a mortgage only to find themselves without nothing to fall back on in the case of a layoff or medical occurrence.
Take for example what’s going on right now in our economy. Many people are trying to refinance to take advantage of lower rates but can’t get that cash locked up in equity due to depressed values. Or they may have possibly loss all their equity (savings) as values have dropped. So they have no equity and no money. What a position to be in!
How does this happen? When a home forecloses in your surrounding area, the bank looks to liquidate that home as quick as possible. Yet this distressed sale becomes a comparable to base your value on. The idea is if a person was shopping for a home like yours, would they pay what you feel is market price or purchase a similar home at the foreclosed price. Because of all the inventory of homes on the market, they are in many cases looking to get what they can to get it off the books, write down the loss and move on.
Which leads us to our Strange Paradox. If you have heard me speak, listen to my radio show or have read previous articles, you will see/hear me mention that fact that VISA reports t the average American saves -0.3% annually. Which simply means not only are Americans not saving, they are going deeper in debt every year. However in these times of financial crisis, it has just been reported that Americans are now saving more than ever – WHICH IS EXACTLY WHAT WE DON’T NEED!
Huh?!
Yes Americans need to spend money. That sounds like the exact opposite of what I preach – what gives?
Here is the deal, the death spiral if you will. People stop spending, retailers go out of business. Retailers go out of business people get laid off. Manufactures have no stores to sell there products to, so they shut down plants, laying people off. Laid off people don’t shop for anything other than the staples of life for obvious reasons. Therefore instead of buying a new car, they patch up the old one. The auto dealerships shut down and the manufactures lay people off. Laid off people do not buy new homes, so contractors go out of business and building supply companies start laying people off. And so on and so on. Then the news reports who was killed today, how many people were laid off and how the world is “going to hell in a hand basket”, and so the people with jobs get scared and don’t spend. Which leads to more people being laid off and the downward death spiral continues. How does consumer confidence come into play?
A vibrant economy is one in which people feel good about the economy and are spending. The spending of money is like the copious rain showers on spring flowers bringing everything to life. So how can we spend despite fear and ultimately get over it?
A couple of first steps are to manage our cash flow so we know what we can afford to spend and spend wisely. Get with an attorney to protect your assets, with simple estate planning. All middle class people need estate planning. Consider disability insurance as you are 3 times more likely to be injured and unable to work than be killed. Buy a new home, especially if you’re renting. Once the market turns we will probably see an unprecedented run up in real estate values as they get back to normal. You can also – possibly – buy a much ‘better’ home in better school districts, with more features for the same monthly payment you have right now in a 30 year fixed. The reason is because rates are low and real estate values are low.
Invest – don’t just horde cash, but only after having 3-6 months of living expenses set aside in cash. Stocks are also at steep discounts. You can invest conservatively. Get with some one who knows what there doing or call my office for a referral.
Get life insurance. But speak with some one that can explain the living advantages of life insurance and help you to understand why the company you work for probably has a different structure on the life insurance for their executives then you have as part of their gold parachute. What’s the secret they are not sharing that you.
Find out what your car is really costing you and consider buying a new one. Add up the money spent over the last year in repairs and maintenance. Is that number higher than a new car payment over the same time? Look at it this way BMW offers 4 years/50,000 miles of free maintenance on any new car and 0.9% with 2 months with no payments. Does that sound like a company wanting to sell some cars? Understand I hate shopping for cars, but do the math and see if it makes sense for you.
Keep in mind that even during the depression 75% of the country had jobs. So manage your money wisely. That includes spending wisely.
The underlying reason for this is because the banks have to keep a certain amount of cash available to offset defaulted loans. The more defaults, the higher the cash reserves. The higher the cash reserves the fewer loans they can make. The smaller that gap becomes, the greater chance the Feds will step in and closes the bank deeming it insolvent. This is the reason why some of the biggest banks in the country, though having billions on deposit still collapsed. The gap between cash reserves and defaulted loans is usually around 10%, meaning that if you have $1,000 in bad loans you need $1,100 in cash. One interesting dynamic of this crisis is the drive to get people to open CD’s. If you notice the banks in the biggest trouble were offering the highest CD rates. This is because they need the cash on deposit to keep the Feds off there back.