Wednesday, December 10, 2008

Financial Planning in a Time of Uncertainty

If there's one overriding problem with federal policies to deal with the ongoing financial and economic crises, it's that they've failed to reduce uncertainty. Banks are seeing a thaw in the credit crunch, but primarily because interbank loans are guaranteed by governments now. Why not make a loan if the government will ensure repayment? Consumers and nonfinancial corporations don't enjoy government backing. They are being squeezed ever more tightly by a vortex of credit cutbacks, reduced consumer spending, layoffs, flagging consumer confidence, business closings and failures, more layoffs, even less consumer spending, so on and so forth, etc., etc.

Federal economic policy to date has been aimed at stabilizing the banking system, not the real estate market. Falling real estate values, which show no signs of bottoming out, only exacerbate the problem. There won't be a significant rebound in real estate for years. That means no free flowing home equity loans, no easy refis, no quick exits from loan defaults by selling the property, and all the other tricks that worked so wonderfully when real estate values were rising at abnormally high rates. There won't be any magic elixir for the economy coming from real estate.

Where and when will it all end? Nobody knows. Even with Bush administration backing, a potential bridge loan for the American auto companies seems to be in trouble in the Senate, where the Republican old guard will make one final stand before the Obama administration takes office. The Republicans might, one last time, have their way momentarily. If they do, however, that means GM and Chrysler bankruptcies, and possibly Ford as well. (See the preceding blog for why.) What could ensue from those bankruptcies is unclear, but sure to be ugly. The only question is how ugly.

What's a person to do? In a time of national uncertainty, create some personal certainty. Don't wait for the government to stabilize things. Stabilize your personal finances. When financial storms are blowing, the most stable have the best chance of survival. Here are some things to think about.

Save more. During hard times, nothing provides financial stability and high quality sleep as well as a nice pile of cash. See

Maintain health insurance coverage. Nothing can wreck your personal finances like a major health problem. Health problems are perhaps the most common reason for individuals to declare bankruptcy. If you're laid off, exercise your COBRA rights to stay with your employer's group policy. If you think COBRA is too expensive, exercise your rights anyway, to be sure you've coverage for at least the next 18 months. Then, shop around for a cheaper policy. But first make sure you're protected. If your employer goes out of business and terminates its health insurance coverage, look for alternative coverage (for more information, see and But don't go uninsured.

Consider a job with a pension. Pensions still exist. Some large corporations offer them, and many government and educational jobs offer pensions. The same is true for military service and many law enforcement jobs. Not everyone is cut out for these jobs. But if you are, your golden years will be a lot rosier with a pension. See our discussion of hope for the financially lost at

Increase your Social Security payments by working longer. Social Security is actually a government sponsored pension program for almost all workers in America. Your payments increase if you work more years, and are adjusted for inflation. While Social Security itself provides only a modest income, it's a darn sight better than poverty. The longer you work the more Social Security you get, and the more stable your finances will be. See

Pay off your mortgage. With today's real estate crisis, this one's a no brainer. Don't think about how you might leverage your house to make money in other investments. What other investments are there today that could make you a higher return than the interest rate on your mortgage? And even if there might appear to be some, how would you cover the risk of the investment failing? (As we now know, it remains possible, even in the 21st century, for investments to fail.) Paying off a mortgage clears the roof over your head of a really big lien, which significantly reduces your risks. Reducing risk increases stability. And that's the name of the game today.

Marshal your assets. Get your finances organized and make sure you've got everything you're entitled to. Cash all checks you receive--believe it or not, large numbers of checks (including some IRS refunds) are not cashed or deposited. Close out small bank accounts you're not using. If you have a jar of change you're not using, take it to a bank and deposit it. Sell property you have no use for and no sentimental reason to keep. Find out if you have unclaimed property. If you do, claim it. See and

Reduce and avoid debt. This one shouldn't need explanation these days.

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