Good Money Blog

The entry was started a little bit more than a month ago since I have been a sideline watcher. The news in the past month was surrounding continuing housing weakness, subprime problems, faltering economic growth, and, most importantly, inflation fear. Although President Bush and Fed Chairman Bernanke have repeatedly said that the country isn’t headed to a recession or stagflation, only time can tell whether they’re right or wrong.

No matter what it’s going to happen, it’s better to be safe than sorry. To survive this highly possible recession and bear market, which could be lengthy and last for sometime, people with financial awareness should have their own game plans. Since this is a beginner guide, it won’t suggest or mention any highly risky alternatives or options, which will be covered in a more comprehensive guide:

• Employment: The #1 concern for most is likely their job security. If fewer people are going to spend, corporate profits will shrink, and, consequently, job cuts will be on the way. If one doesn’t feel secure on the job, one should start upgrading their skill sets, updating the resume, and looking around. Even if one works in a relatively stable environment, he or she still needs to make sure the emergency fund (at least 6 to 9 months of monthly spending) is accessible and ready for any unexpected circumstances.
• Inflation: One thing that will hit everyone, rich or poor, is inflation, the biggest monster in the modern world. For twelve months ended December 2007, the core CPI was 2.4% higher than the year before. The government officials pointed to that number and tried to convince people that inflation was never a problem. However, it is very important to note that the core CPI excludes two very important categories - food and energy. Therefore, a closer look at individual spending categories is crucial. As stated in the latest CPI Summary, the annual price increases for energy, transportation, medical, and food were 17.4%, 8.3%, 5.2%, and 4.9% respectively. People must be concerned if their investment and income haven’t grown as fast.
• Rates: Whether a rate drop is good news or not depends on one’s situation. In general, a lower rate is good for borrowers/spenders but bad for savers.
  • Borrowers: It’s the best time to eliminate any high interest debt as it provides a risk free return on the money. Mortgage borrowers should consider refinancing or switching to a better loan plan. Of course, one should crunch the numbers on a calculator and determine if that makes sense with the cost involved.
  • Savers: Banks keep lowering their savings rates. For any money that’s not expected to be used in the next 12 months or more, it should go towards a CD or a money market fund. Since ordinary local banks are paying minimal interest, one should also think about opening a secondary online savings account for a better return, if haven’t done so already.
• Market: At this stage, the market can be extremely volatile and unpredictable. If the time horizon is short (less than 5 years), people should stay away from equities for investment purposes. However, investors should stand pat on their long-term investments, especially retirement funds. With dollar cost averaging (DCA), the investments made when the market is low will be rewarding down the road. It should be noted that the key to successful investing is diversification and asset allocation.
• Cost of Living: The government wants people to keep spending and get the economy going, and that’s the primary purpose of the tax rebate in the economic stimulus plan. While big spenders can keep spending as they wish, people should instead think about lowering their living cost. It’s a great time for people to review their budget plan, shop around for cheaper service providers, or eliminate wasteful spending. Since great investment opportunities are few and risky these days, $1 saved seems better than $2 earned.