Preparing for the coming financial storm

In a comment to an article I posted last night about the true dimensions of the US financial crisis, reader Hydrogeek observed:

“You are urging us to take what precautions we can, and I’ve been thinking this too, but I’m not sure what all to do. I’m growing my garden, and am going to try to preserve more than I usually do. What else do you think we should do?”

I promised I’d write about that tonight; so here goes. I’ve divided my suggestions into three main areas.

1. Aim for greater self-sufficiency.

There are many practical steps individuals and families can take to become more self-reliant, rather than depend on Government aid or commercial supply systems that may not operate as smoothly (or as affordably) as in the past. Some ideas:

• Learn useful skills such as motor vehicle maintenance, carpentry, home repair and restoration, plumbing, electrical wiring, etc. Doing these jobs yourself can save an enormous amount of money, over time, and may also equip you to earn money from such skills in a downturn.
• Grow some of your own fruits and vegetables. Square foot gardening is relatively cheap and easy to begin, and thousands of families are enjoying their own produce as a result. If you have a suitable garden for larger-scale vegetable cultivation, that’s even better.
• Small food animals such as rabbits can be kept even in a suburban back yard, and if you’re in an area that allows you to keep poultry, chickens and ducks are a source of eggs and meat. Those in country areas probably have better opportunities for hunting, too.
• Build up a reserve of food and essential supplies (to include prescription medications, spare spectacles or contact lenses, etc.). It’s not too expensive to have a 30-day supply; a bit more expensive, but not excessively so, to have a 3-month supply; and more costly, in terms of both money and storage facilities, to have a one-year supply. Decide what you can afford (and have space to store), and build it up over a few months, buying extra items with each shopping trip.

2. Aim for financial stability.

If we’re heading into a period of greater unemployment (likely) and higher inflation (almost certain), it behooves us to be as prepared as possible for the worst that may happen.

• Try to reduce your debt load to a minimum. Consolidate smaller amounts owed into a single, larger loan; try to get the best possible interest rate on your borrowings; and try to pay out as small a proportion of your monthly income as possible on debt servicing. The more cash you can apply to more important needs, the better.
• Try to build up a cash reserve. Many people don’t even have enough money in savings to last one month without a paycheck. This is very dangerous! Aim to save the equivalent of at least three months (preferably six months) of routine monthly expenditure, and have it in a savings account or some other immediately-accessible instrument. In today’s climate, it may not be out of place to try to build up a year’s reserve of cash, over time.
• If you have more than three months’ expenditure saved in case of emergency, consider putting some additional funds into inflation-proof commodities. I’m not talking only about gold and silver (although they’re certainly desirable); you can invest in things that will hold their value in an inflationary climate, and will be of value to others, who’ll be likely to want to buy them from you if you need to convert them to cash. Try to think of things that people around you regularly buy, and will want to buy (even more important, need to buy) in future – tools, essential hardware items, firearms, ammunition, etc.
• In the light of the previous point, be warned: if people don’t have money to spare, you’re unlikely to get the price you want for your valuable items. I’d suggest that if you want to convert some valuable possessions to cash, now would be a very good time to do so, while there’s still money out there in buyers’ hands. (Some sellers are already finding it hard to attract buyers.) If the economy goes to hell in a handbasket, you may have to sell valuable items for pennies on the dollar, or be paid for them in dollars whose value has been reduced by inflation. It’s happened before (remember Weimar Germany?).
• The housing market is in the doldrums, despite many attempts to “talk it up”. I personally don’t believe that house prices will stabilize and/or increase for the next few years. I therefore strongly recommend that if you own substantial equity in your home, it would be a very good idea to sell it now, and rent housing for the next few years. Rents are relatively low, due to the cascade of foreclosed and unsellable houses flooding the market; and you can put your profits to better use (see above). You might even be able to make sufficient profit to buy a replacement property in due course at a substantially lower price than today. It’s worth thinking about. (And yes, I’ve already put my money where my mouth is, and done this myself.)

3. You need a network.

If the economy tanks, it’s going to be very difficult for individuals and families to survive on their own. Many more people will lose their jobs; goods and services will be more expensive; and even those with salaries or pensions will find their buying power reduced by inflation. It’s a good thing to be part of a network of family and friends, to support one another.

• Those who have lost their jobs or income can be supported by those who still have them.
• Those who have work can be supported by those that don’t in areas like household chores, supervision of children, etc. In this way, no-one is merely ‘begging’: instead, everyone is actively participating in keeping the network alive in return for assistance received.
• If things get really tight, individuals and couples (even families with children, if the worst comes to the worst) can share housing, saving a great deal on rent and utilities and spreading their cost over more people. Sure, one loses privacy and the space to have all one’s possessions at hand, but in a crisis, so what? One does what one must to survive.
• A range of skills in the network can help everybody. If someone knows vehicle maintenance, another has plumbing skills, a third can do household maintenance and repairs, etc., then the group can benefit from their skills and knowledge, and compensate them by offering skills in other areas, or paying for their work in cash or in kind (helping to ease unemployment among them). Even better, such informal arrangements are inherently tax-free! If your network lacks some essential skill set, perhaps one or two unemployed or underemployed members can start learning it, so as to be able to ’round out’ the group’s knowledge base.

Those are just a few ideas. I’m sure readers can contribute many more. If you have one, please share it with us in Comments, so we can all benefit.

Peter