We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.
The bankers did it, everyone got cold feet, and now we all have to live with the consequences.
However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…
Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed.
1. Get out of debt
Because of the credit crunch, money is becoming more expensive.
I’ve written before about why you must get out of debt. But with the credit crunch being described as a great ‘deleveraging’ (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.
What it means for us
- If you’re already in debt, I’m not saying your bank is going to call you up tomorrow and demand all it’s money back. Rather, the climate is turning against borrowers for the first time in years.
- Banks are increasing loan rates where they can.
- They are less willing to enable customers to shuffle debt using cheap balance transfers.
- They will look much more carefully at impaired credit records, which will be a factor if you’ve been missing payments.
Action plan
Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt. (But please comeback soon!)
Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and policies – that set the stage for the credit crunch?
Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.
This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.
Space operas are exciting, with droids, blasters and galaxies far, far, away. Financial advice is often dull, and focussed on doing without, dying, and matters down, down to Earth. Is it any wonder millions more of us watched the lamentable Episode 1: Phantom Menace than will ever read The Millionaire Next Door?
But what if Star Wars could teach us something about personal finance? Well, read on to discover what the classic trilogy’s major characters know about money.
(Note: I’ve ignored all the characters from the ‘Trilogy of Shame’, even the good one(s). If you know where Jah Jah Binks or Count Dooku would stash their cash, I’d love to read your thoughts in the comments below).
While many people have made a fortune out of property in the UK over the past few years, some have lost a packet – even as prices continued to rise. These are the so-called ‘Sell-to-Rent’ brigade, who attempt to time the peaks and troughs of the house price cycle by selling their home at the top and then buying after the presumed house price crash.
With prices finally wobbling and the credit crunch making terrible headlines every day, now looks a great time to sell-to-rent. Flog your home for £350,000 and you might be able to buy it back in five years for £250,000!
Happy times? Perhaps, but remember:
- 2005 looked a good time, too (prices dipped slightly when interest rates began to rise)
- 2003 also looked a promising time to sell (the onset of the second Gulf War led to a plunging stock market and global gloom)
- 2001 saw the earliest sell-to-renters make themselves known (this was around the time that London property first passed through its long-term price-to-earnings average, which has historically been a good barometer as to the future direction of house prices. It’s proven very unreliable in this era of low interest rates)
Now London property blog The Rat and Mouse notes that the sell-to-renters are back, going on to warn that:
Few financial decisions are as risky, or real-world calculations as tricky… taking in the cost of storage, rents (which can go up and down), the costs of selling and buying, the value of time, inconvenience and risk, all multiplied by however long it might take for prices to start to drop and then assuming it’s possible to buy in just before everybody else does. The chances of getting all this right are low.
Too right. I’ve not sold-to-rent, but I hold my hands up as a would-be first-time buyer who has sat out the property market for several years now, most recently believing that property prices are unjustifiable if you compare mortgage costs with rent.
It’s been a costly error. You gamble with the Great British love of property at your peril.
Catching up with some of my favourite financial blogs (no, Monevator.com is not an island!), I’ve noticed a sour note on those that follow the net worth of the author (e.g. My 1st Million at 33 and Accumulating Money).
I admire these writers for putting their cojones on the line so publicly. My thoughts certainly shouldn’t be construed as a criticism of their efforts.
However, there’s a reason why I don’t track my personal net worth on Monevator.com, and it’s being demonstrated by the depressed tone that many personal finance blogs as the market falls.
The trouble with tracking your net worth
When things are going well, as they did for several years up until the end of the 2007, blogs tracking personal net worth seem heroic. Booming stock markets and rising property prices see an ambitious target drawing nearer month by month. £500,000 no longer seems a distant dream, and £1million looks feasible.
However when markets or property prices fall, progress towards your goal is cut short. And there’s a particular problem when your goal is a net worth figure:
- You cannot control the price the market puts on your stocks or your home
If you’re a financial blogger tracking your net worth, you may be doing just what you did last month or last year – saving hard, earning well, and giving us a ringside seat – but suddenly the results don’t look so good. This can be dispiriting, and I’d be concerned it could turn me off investing altogether.
My approach: focus on goals and targets I can control
Goals are crucial, but they have to be attainable for you to keep working towards them. Attainable means controllable. Have a target of a million in the back of your mind if you want (I do occasionally add up the value of all my investments), but in the meantime focus on stuff that you can achieve.
Controllable goals include:
- Saving 15% of your salary
- Reducing your monthly shopping bill by 20%
- Doubling your income over the next five years
These are all financial goals you have some ability to move towards achieving – it’s up to you to save more, find cheaper groceries, or boost your career. The price of groceries may rise or fall, or you may find it hard to get a raise, but that’s nothing compared to being at the mercy of uncontrollable fluctuations in stock markets.
With stocks and shares, we hope our investments will go up over time, but in the short-term they can plunge, as this bear market has repeatedly proved. It’s out of our control.
Good longer-term targets might be:
- A monthly income target from your investments. (I recently wrote how replacing your salary with investment income could be a good long-term goal). Income from a basket of dividend paying blue chip shares and bonds is much steadier than the same portfolio’s capital value
- Maxing out your tax-saving investment plans each year. (For instance, I think in the UK anyone with sufficient earnings should try to use their annual £7,000 ISA allowance.)
Create your own targets that suit your situation, but I’d suggest concentrating on things you can do, like saving more, not things that will be done to you, like the particular return from the markets in any year. Like this you focus on what’s achievable by you now, not on how generous the stock market may be feeling.
Ironically, it’s a better time to buy shares for income than a year ago. You can get 10%-25% more dividend income from a basket of leading shares than at the peak of summer 2007. In the long-term, markets (shares and property) will bounce back, and this bear market will likely be seen as a great buying opportunity rather than a time for apocalyptic hand-ringing.
