The Credit Crisis Survival Guide
The stock market and global economies are spiralling out of control. Banks are failing, people are worried about their finances, their job, and their house. Are you worried? Welcome to the Fool's 8 point credit crisis survival guide!
Take some deep breaths. Smell the autumn air. Large parts of the country are experiencing seasonably warm weather and bright sunshine. Enjoy it. Take your mind off the credit crisis and all things associated with it.
2. Don't panic
This is related to my first point. Fretting and panicking will not change anything.
It won't stop doubts about the health of the global banking system.
It won't necessarily stop stock markets going down.
You worrying about it won't stop the UK going into recession.
Any money you have lost on the stock market is gone. Worrying about it won't bring it back.
Your health is your number one priority. Don't let things outside of your control take control of you.
3. Prepare yourself for recession
You are witnessing history. We've seen nothing like this before in our lifetimes. 82 year-old former US Federal Reserve Chairman Alan Greenspan recently said "This is a once in a half century, probably once in a century type of event".
We're in for a couple of years of economic pain. The economy will retract. Unemployment will rise. Wage rises will be minimal. House prices will likely keep falling. Accept it, and start getting used to it.
It's definitely not the end of the world. We've had recessions before and we'll have recessions again. Every recession to date has been followed by periods of economic growth. This time won't be any different.
Getting your head around the reality of today will help you deal with the future. Living in the recent past, especially regarding the housing bubble and the excessive use of debt, is no use today.
4. Live within your financial means
If you are not doing it already, start living within your financial means. That means stop funding your lifestyle with debt. Stop living off your overdraft or your credit card. Make a plan to pay off your debt.
Start saving money.
Open a new savings account and see if you can put £50 in it each week. If £50 sounds a lot, just think of some of the ways you can stop spending money.that daily coffee at Starbucks, buying lunch every day, walk or ride to school, work and the shops rather than driving, one less night out a week etc.
Consider cancelling or deferring discretionary spend on things like a holiday abroad, the French annual skiing trip or big ticket items, like a new car, plasma TV and a new kitchen.
In short, live within your means, and save for your future.
5. Make your job indispensible
Just about every boss in the land will already be thinking about how they can cut costs, and that means employees like you and me.
The loafers will be the first to go. Don't be a loafer - if you lose this one, it will be very hard to get another job.
The thumb twiddlers will be the next to go. Instead of twiddling your thumbs, ask your boss what extra work you can take on. Even better, identify a task or role where you know you can add value to the company, and volunteer (with gusto) to take on that role, in addition to your regular job.
Finally, always stay friendly with your boss! (Ed - you're the best boss ever!)
6. Spread your savings
There are plenty of fearful stories here on the Motley Fool of people who've invested large amounts of money in failed Icelandic banks Kaupthing Edge and Icesave.
These people have been assured they will get their money back, but I can only imagine the pain, angst and stress they went though when the news first broke, and are likely still feeling today.
Fool colleague Cliff D'Arcy wrote this excellent article - Big Banks For Safe Savings. Check it out.
My advice is to spread your savings over a number of different savings accounts. That said, I don't expect any savings to be at risk in any UK-facing bank, as I expect the Government will effectively guarantee bank deposits all institutions.
But it's better to be safe than sorry.
7. Be patient
The stock market currently resembles a horror show. Shares across the globe are being sold off, many indiscriminately.
The markets are in a downward spiral they currently can't stop. Those people who use margin to trade shares are suddenly finding themselves having to sell to meet margin calls. Individuals are selling, to end the pain.
In the US, mutual funds investors withdrew US$72bn from US-managed stock and bond mutual funds in September. The first week of October saw an additional US$49.3bn of outflows. Hedge funds are facing the same issues - client redemptions.
As the market falls further, the redemptions increase, meaning more selling. The downward spiral keeps spiralling downward.
But it will stop. Value will eventually be rewarded. The share prices of high quality, growing companies will go up. Eventually.
Patience is required. It may not happen overnight. Be patient.
8. Be brave. Be bold
This stock market is a buy.
Not every stock and sector is a buy...
I would be steering clear of banks, because I don't think anyone can value them right now.
I would be steering clear of real estate stocks, because I think there is more pain to come regarding house prices.
Definitely steer clear of companies with high levels of debt.
But there are plenty of cheap, growing, cash-rich companies out there. Sure, they may not grow as much over the next couple of years, and their profits may even shrink, but on a 3 to 5 year view, they have the possibility of doubling, tripling and more.
If you are like me, and largely fully invested in the stock market, you'll have to sell if you want to buy. If you're also anything like me, you'll have some lower quality companies in your portfolio.
Bite the bullet, sell the crap, take the loss, and replace with cheap, quality shares.
[If you are feeling bold, how about checking out the Motley Fool's Champion Shares share tipping service. The first 30 days are absolutely free.]
In summary, these are trying times for us all, whether that be savers, investors, home owners, retirees.whatever. They will pass, and things will get better. In the meantime, it's time to get realistic and take all measures possible to survive these trying times.