If you read the news today, you might have noticed that the Dow Jones Industrial Average dropped 777 points today in response to the financial rescue plan failing to pass in the House of Representatives. Contributing to the uncertainty is Citigroups buyout of Wachovia’s banking operations and the jitters from world markets. Though we may be down over 10% on the Dow just in the last few weeks of trading, but here are some quick tips to help you weather this financial storm:
1) Think Long Term
As long as you’re not retiring in the next 5-7 years, hang in there! The market is a cyclical beast, meaning it’ll have its ups and downs.
“A well-founded long-term investing strategy — with allocation among and diversification within investment classes — will carry you through good times and bad to reach long-range objectives. The risk of using short-term thinking with long-term money has the potential to far outweigh the effects of inherent volatility,” says Greg McBride with BankRate.com
Keep your eye on the ball, but also make sure you’re taking a look at the game as a whole as well.
2) Don’t Pull Your Money Out of the Bank
The worst thing you can do right now is pull your money out of the bank and stuff it under a mattress. Banks are safe and your deposits are backed by the FDIC. The markets cannot function without your deposits. Yes, really!
It’s called the multiplier effect. 20 cents of ever dollar you deposit is held by the bank, and the other 80 cents is lent out to other borrowers who need it. They spend the money and it is eventually redeposited to be lent out again. Look at this cycle happening 10x and you’ll quickly see why $1 has the power of $10.
3) Don’t Hold Back on Spending…
Part of the reason why our economy has slowed down is because of the lack of consumer spending. Spend and buy as you normally would. That’s one way to directly contribute to our economic recovery.
4) …But Remember to Save Some Money Too
There’s no better time than now to create a 6-month emergency fund to help you weather a loss of a job or an economic crisis. You’ll be set in case you get laid off.
5) Pack it in for a Possible 18 Month Ride
The number one question I received in the past few weeks is: “When will the recession be over?” In all indications, it’ll be AT LEAST 18 months before anything starts to pick up again. That’ll put is in the year 2010. We have sky high unemployment, large losses on Wall Street, and flat consumer spending. The biggest issue is that there is still 18 months of supply of homes on the market that needs to be sold off. Also, not to mention that we’re still waiting for the next wave of mortgage foreclosures to hit the banks.
The effects of a recession are more psychological than anything else. Hang in there and we’ll ride it out together.
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