April 06, 2023
When it comes to building financial freedom, I’ve always found it so interesting that people tend to put all their energy into figuring out how to make money and don’t give enough attention to protecting their money and their household when the markets and the economy go through rough times. That’s a dangerous approach. The past 15 months have been an ongoing lesson in why protecting your money should always be a central piece of your financial strategy. We had a bear market in stocks and an unprecedented bear market in bonds in 2022. The failure of Silicon Valley Bank last month has set off a global financial scare that is still playing out as I write this in late March.
It is always smart to make “playing defense” part of your permanent financial strategy. But right now, I can’t overstate how crucial it is to make sure your defensive game is strong. I have been warning you that we may be headed into a recession sooner than later. The recent turmoil in the banking sector only makes me worry more.
Here’s how to build protective defense into your financial strategy.
Keep pushing to build up your emergency savings.
Right now overall unemployment is low. But that can and will change if the economic turmoil triggers a recession. And let’s be clear-eyed here: recessions are part of our economy. The question isn’t “if”, it’s “when.” That’s why building an emergency fund that can cover your household expenses for a year should always be a top priority. And you already know how much I like the Ultimate Opportunity Savings Account as a place to keep (and grow) your emergency fund.
Confirm your money in a bank or credit union is federally insured.
As I explained in my blog last week, in the very rare event your bank or credit union fails like Silicon Valley Bank, you will not lose a penny of your deposits (checking accounts, savings accounts, certificates of deposit, money market mutual funds) if the combined value is no greater than $250,000. The $250,000 per person, per bank/credit union of federal insurance is just a minimum. You can in fact have even more federal insurance based on the types of accounts you have. Please review my blog from last week which explains all of this in detail.
Work hard to pay down credit card debt.
An already bad deal has gotten even worse. The average interest rate charged to customers who don’t pay off their bill in full has risen more than four percentage points in the past year and is now more than 20%. And the last thing you want to have hanging over your head if a recession causes a layoff in your household, or reduced hours, is to have to stay current on a very costly credit card balance. Please be extra strong right now, and scour your spending to find ways you can reduce your costs, so you have more to put toward paying down high-rate credit card debt.
Delay big-ticket purchases.
Now is not the time to stretch to buy things that aren’t 100% necessary if you’re still working on building up your savings or paying off your debt. And if we do have a recession, chances are that interest rates for mortgages and car loans will fall from their current level. Sure, that also means credit will “tighten” (that’s the insider lingo for when lenders are so spooked by what’s going on in the economy that they make it harder to borrow money). All the more reason to spend time now building up your financial defenses. Having less debt and more savings will make you a better risk for any lender to take on. That’s true regardless of what is going on in the economy.