Tuesday, September 30, 2008

Worried about the economy? Here are some quick answers to common questions

I was going to post about myself, my life, and my observations about the world around me today. However, I'm hearing so many people say that they don't understand how this current economic crisis is going to hit them personally, that I wanted to do my part to try to get the word out about 4 common questions that many people have asked me over the past few weeks:

1.) "Do I need to pull my money out of my savings and checking accounts and put it in my mattress?"

No. Please don't do that. If it gets stolen or you have some disaster like a house fire, you'll lose it all. Also, as long as your money is in a bank that is FDIC-insured, your money is safe up to $100,000. If you have more than $100,000 with the same bank, then take out the balance above $100,000 and move it to an entirely different bank, not just into another account at the same bank. The $100,000 insurance is per depositor, not per account! Don't know if your bank is FDIC-insured? Call them, stop into a branch, or visit their website.

2.) "I think I am going to stop investing in my retirement fund because the market is so bad. Is that a good idea."

No. No, no, no, no! Please don't do this. Please. Economies go in cycles. You need the compounding on your retirement savings to make retirement plans work. If you pull out your money or stop investing, you will lose the compounding factor you need. And you'll pay hefty penalties on the withdrawal plus lock in the loss. What you can and absolutely need to do is make sure that your portfolio is balanced. Many retirement plans have a "set it and forget" plan. That's what I have. You plug in the number of years you have until retirement, and the plan automatically calibrates different investments to get you to your retirement goals. Still unsure? Make an appointment with an advisor at the institution that manages your retirement accounts - it's free and it's their job to explain your options to you. And if you don't know how to make an appointment with them, contact your HR department. 

3.) "This job market is so crazy that I've decided to get out of the job market. Is that a good idea?" 

AH!!!!!!!!!! No - no no no. Don't do that. If you retire now, you essentially lock in all the loses your retirement fund has just been hit with because you begin to draw on those funds yo worked so hard to save. This is bad - really, really bad. You worked hard all these years, and you're not getting the full benefit of that hard work. If you're quitting your job with nothing else to go to, you need to reconsider immediately. And change your mind - do no leave your job without another place to go. There will likely be nothing for you to go to. Now, I do think you should be networking and watching out for new employment opportunities that sound interesting. Actually, I think you should ALWAYS do this, even if you are 100% in love with your job. You need to cover your bases and in this day and age, getting a job interview (and probably getting your dream job or even just your next job) has much more to do with who you know rather than what you know.   

4.) "I don't think Wall Street zillionaires should get a bailout so I'm against the Government's $700 billion plan."

I don't blame you for being confused on the bailout - I blame politicians who don't understand economics (inexcusable) and make this a partisan issue (also inexcusable). This is not about bailing out Wall Street. I'm really upset with the person who coined this plan as a "bailout" - it's not. This money will make the Federal Government a bank that will loan money to banks like Citi or Bank of America to make it easier for those banks to responsibly loan money to average consumers (you and me). There will be plenty of Government oversight to make sure that money is loaned responsibly. And when the market recovers, those banks will pay back the Government, who will pay back the tax payers.   

If we don't have this plan, here's what will happen:
Access to credit will plummet, making it hard for all Americans and all American businesses to have any access to credit. All free markets need access to credit to function properly. This los of access to credit is not good - you won't be able to get car loans, schools loans, mortgages, or any other kind of consumer loan. Credit card companies will cut your limit. All businesses, whether it's your local pizzeria or GE, will not be able to get the loans, short-term and long-term, big and small, that they have to have to do business and to get us the goods and services we need to survive. Bankruptcies and home foreclosures will skyrocket, and as a result, unemployment will also skyrocket. We'll be in a downward spiral.

So here's the choice: a) pay some more taxes now and get that money back in the fairly near-future so our economy can get going again. b) pay a whole lot more now with people losing their homes and companies going out of business, causing unemployment to rise rapidly, and pay even more later as we struggle to deal with the fall out. And we will ALL deal with the fall-out, especially those in lower and middle income brackets. The recovery from option b) will be slow and painful. a) will be less painful and shorter. I'm going with a). I don't like that we're in this situation, but here we are.

This might be the only idea that George Bush and I will agree on, and I took some convincing. I read A LOT about this, talked and listened to a lot of people very knowledgeable in finance. At this late date, the horse is out of the economic barn and the only way to corral him back inside and under control is through a rescue plan. There simply is no other better option.  


can-can said...

Great advice. Don't quit your job is good advice unless you'd gotten to the point, like me, that I was probably going to have a "throw-down" with my boss. Jail or quitting? I quit and have grabbed every part-time gig, consultancy, etc., that I can. I have to work to make a living so I've been able to do so.

About FDIC coverage - I read in the Boston Globe something that if there continued to be bank failures, etc., FDIC could run out of funds itself. What is your comment on that? I know that they amount covered has been raised to $250k on 1 year I believe.

I do think that, in general, we Americans, have lived for too long on credit and need to return to more cash, delayed gratification, being able to actually afford what you buy, and distinguishing a want from a need.

Christa said...

Hello! Thanks so much for reading my blog and for your comment. Technically if many banks failed all at the same time, the FDIC would go under. However, the amount would have to be astronomical for that to happen. Essentially we would have to revert back to the Great Depression (not something like it, but have the situation be as bad as it was in the 1930s) for the FDIC to fail. Bottom line is, your money is safe in banks that are FDIC insured, provided that you have $250,000 or less at any one institution. You are right that the level has been raised from $100,000 to $250,000 in the time since I posted this article.

Again, thanks for your comment!

All my best,