Qustions: “What’s happened?” “Who can I blame?” “Why is the government spending my money to bail out the Wall Street fat cats?” I could spend lots of time answering these questions (and I might below) but the reality is that these questions are totally irrelevant. It’s good to look back to AVOID our mistakes, but this is the time to move forward not look back.
- Your money is generally safe
- Bank checking, savings, CD, and money market accounts are FDIC insurred ($100,000 per bank per tax ID)
- Credit union checking, savings, CD, and money market accounts are NCUA insurred ($100,000 or possibly more)
- IRAs (up to $250,000)
- Brokerage accounts SIPC insurred (up to $500,000 against brokerage failure - not investment losses)
- The media and even campaigning politicans are inciting fear and sensation for ratings or personal gain
- The sitiuation, however, is still serious
- Things are bad and will get worse before it gets better
What Can I Do?
Worry about things YOU control.
- Do not pull your investments
- They’re going to go up and down wildly for a while in a general downward trend
- Things will look depressing for a while
- Do NOT touch your 401(k)
- Do NOT change your contributions to your 401(k)
- Make sure you have enough money
- Cut back on expenses and save more
- Make more than usual sacrifices in your life to save more money
Most people don’t save enough to begin with, and when the market takes a big downturn they panic because what little savings they have shrinks dramatically. Such is the nature of investing in the market. If you cannot handle these risks, you need to move to more conservative investments. In the long run you will not earn as much, but you’ll feel much better for the entire ride as you head towards your goals. My dad is extremely conservative and did not invest in much more than CDs, and he retired at age 55 and one day because of careful planning. He avoided snap decisions and stupid mistakes, and he choose a route that suited his risk tolerance.
Saving more is the SINGLE best think you can do to mitigate risk. If you’re like most poeple, we barely have a solid grounding in personal finance to handle our finances. Let’s not pretend we’re able to handle the macro-economic topics in the newspapers. At the micro-level, you can control everything that happens to you. The whole market can collapse around you, but if you set yourself up well, you won’t be worried.
Give me an example of what you mean by that:
I’m in the processes of buying a condo so most of my money is in high-yield money-market accounts and CDs. Why? I get some growth out of my money with little risk of losing it - all of it was under the FDIC and NCUA caps. I do have a high-risk Roth IRA portfolio that’s actually worth less right now than the cash I put in, but I’m not worried about it because I know that I won’t need to touch it for many years. Truthfully, I don’t look at it more than once a week now because it’s simply too depressing to think about. But the point is, I don’t think about it because I trust my long term plan. Same goes for my 401(k). I also have a Roth IRA at a credit union in a CD. About 40% of my Roth IRA is in this credit union. Thus, although my other IRA is abysmal, this Roth IRA is still plodding along at 4-5% earning money for my retirement. Right now, I can control everything in my universe that I care about - namely my money. The economy could absolutely tank, and I should still be okay.
I’m freaking out and I feel like I need to do somthing
If you’re freaking out, it’s a good idea to talk to people who are NOT freaking out. Find out why they’re not worried. You’re looking for people who have a long term plan. Talk about asset allocation and risk tolerance with them. Avoid people who have no reasoning for their position, or who are taking things on faith. Faith may get you saved, but it won’t protect your money.
Do NOT ask stupid questions. Since most people freaking out lack a long term plan, trying to figure out the pros and cons of the bailout package is (no offense) above your understanding of finance. Worry about what you can do to do better by you. If you must, try to help other people do better by them. Do not try to figure out how to save the nation. It will only cause you undue stress and anxiety.
I’ll let you know a little secret about the bailout… no one knows what’s best.
- Let’s get the economy moving
- Bailout will take away debt (namely mortgage securities) from financial institutions
- Financial institutions can loan x times how much money they have
- Since the bailout will reduce their debt, they could loan more to the people (we’re talking credit and business loans etc. more than mortgages here)
- Businesses should be able to access more money allowing them to hire, do research, expand, grow
- The economy should start moving since businesses can produce
- There were A LOT of shoulds there. TRUE.
- Things MAY not work like that and the economy may still get worse and we might have wasted money
- On the other hand we MIGHT avert a serious recession or even a depression with this move
- Who knows!?
- History tells us most times we think we can tinker with the economy, we get it wrong
- This is true…
- This has also been wrong, just not as frequently
- Looking at our politicians and media, there is more hype and saving face than actual thinking and saving
- This fact does not bode well for any move made by our “smart” legislators
- We’re throwing hundreds of billions of dollars away to save Wall Street… right?
- That hundreds of billions of dollars will be thrown away is FALSE… probably…
- The idea is to buy an investment in these (right now) worthless securities by issuing more federal bonds
- China or other emerging markets will probably buy these further indebting the US in the future
- The worthless securities SHOULD become worth-ful sometime in 5-30 years where the US could turn around and sell it for a profit
- The US government could use that profit to buy back those original bonds
- We COULD turn a huge profit
- On the other hand we might not make enough to cover the interest on the bonds and might end up in a loss
- But that loss is not going to be the full amount borrowed and may be worth saving the economy from depression
- We might save the economy now but ruin things later… true
- But we might not go into a depression anyway no matter what we do
- We’re using Main Street’s money to save Wall Street
- Yes we are. Life is not fair.
- Even if we didn’t save Wall Street, the Wall Street fat cats ALREADY made their money and the companies they ran will fail with your money in it
- Main Street’s RETIREMENT money is in Wall Street, so we are really still helping Main Street
- Don’t forget we might just turn a profit out of all of this
- You just argued that it will and will not work
- Yes. Because no one REALLY knows.
- There’s lots of smart people who have very educated ideas and theories, but even they don’t REALLY know
- There’s also lots of smart people with very good arguments on both sides
- Let’s call up Doc and Marty McFly. They could tell us with the help of a DeLorean and a flux capacitor…
This blog is NOT financial advice. I am not a financial guru. I do not speak at seminars. I do not write books (yet). I am not a Certified Financial Planner (CFP) nor am I a Certified Public Accountant (CPA). I do not even have a business degree!
This blog is about MY money, usually focusing on how I spend less of it, how I invest it, and sometimes how I make more of it. This is that neighborly talk you have about money. Sometimes the advice is sound. Sometimes the advice is stupid. You judge that for yourself. What works for me may not work for you. This is an open discussion about my financial life and what I would do in certain situations. Agree or disagree, leave comments and I will respond to them or write further entries regarding them.
My name is Jason. I am 24 years old. I graduated with a Bachelor of Science in Computer Science, but I have an interest in money and things related to it. I am currently employed full time and single (from a financial standpoint). I want to know how to earn more of it, save more of it, protect it, invest it, avoid taxes, etc.