How To Survive the Next National Financial Crisis
Slight Tremors Have Turned Into a Reverberating Rumble
There is a lot of buzz in the media these days about the threat of another global financial crisis similar to the one in 2008.
In the United States, 50 per cent of the American populace believes the country is headed for another economic meltdown like that of the Great Depression that started in 1929 and lasted throughout most of the 1930s.
And it took World War II to get America great again.
It has been 10 years since the start of the United Kingdom's financial crisis, and after a long decade, the country still is not faring so well as people's fear over Brexit grows.
The country's woes may get worse with the implementation of Brexit in March 2019.
But as the “debt binge” was the cause of the United Kingdom’s financial woes, Brexit appears to be the biggest shock to the national economy.
The Bank of England warned of a 30 per cent drop in property values and a 10 per cent unemployment rate, which is double the current rate.
Then there is Australia feeling the same pain as America and Britain, with leaders unsure if the country is prepared for a global financial crisis.
Some economists we are heading towards another global financial crisis. If that is the case, how can you protect yourself through the storm?
Lock in Low Mortgage Rates
When you lock in low rates, the lender guarantees they will maintain a specific interest rate, as well as a predetermined set of mortgage points if the mortgage closes by a particular date.
A point translates to a fee or rebate equal to 1 per cent of the loan. In most cases, rate locks have a duration of 30, 45, or 60 days.
However, this depends on the lender, with some being shorter or longer. The function of a rate lock is to protect the borrower from future rate fluctuations during the lock period.
But locking in low rates also involves some key elements.
♦ It's All About the Timing.
The first thing that should be done is to find out when your loan is projected to end, then work their way back to estimate the best time to lock the rate. If 45 days is needed to close a loan, inquire how much the interest rate would be if the price were locked for a 60-day period.
The second thing is to look for a perfect combination of interest rate, term, and cost needed to get the excellent deal. Majority of lenders will not lock an interest rate for less than 30 days unless the lender is ready to close and offer the same rate for a period of 15 to 45 days. It would help if you asked what the standard rates are for 15, 21, 30, 45, and 60 days.
Anything going over 60 days starts getting expensive, so common sense says to wait until the closing date nears and check again.
♦ Grab It While You Can.
Here is a real-world example: A man was in New York touring Hersheypark with his family when he got an email from his mortgage loan officer. The family were in the process of purchasing a four-bedroom, 2,200-square-foot house in Manhattan, New York City, and the rates had suddenly dropped.
They had an opportunity to lock in at 5.245 per cent for 45 days and needed to give their mortgage loan officer the green light. The man replied in the affirmative via email while enjoying time with his family at the theme park.
Later, he expressed to his mortgage loan officer how happy he was with the rate. Now he could focus on other important things such as packing, moving, and getting his children prepared for new schools.
♦ Ask about the entire lineup of mortgage rates available rather than picking one right away.
Lenders call selections of interest rates buckets and many times there are variances among rates, which are affected by the contingent nature of the banks' investors.
There are some companies offering free online mortgage and remortgage calculators so that you don't pay too much.
"When locking a mortgage rate, don’t concentrate on the media frenzy or cocktail conversations on whose rate is lower. Focus on the estimated closing date, and time your rate lock with that." -Dale Robyn Siegel, Bankrate.com
Decrease Bond Duration
Short-term bonds are typically funds that invest in debts that mature in one to three years. The shorter the amount of time until the bond matures is, the lower the risk that rising interest rates will result in a decline in the fund's principal value.
This makes short-term bonds more attractive to investors compared to intermediate- and long-term bond funds. However, the most conservative of short-term bonds come with a small degree of share price fluctuations.
- Bond Definition | Investopedia
A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate.
For the lowest risk, some investors choose money market funds. But since money market funds provide some of the weakest yieldings, short-term bonds remain a more favourable alternative. Short-term bonds are usually thought of a being the next rung up the ladder when it comes to both risks and returns potential.
Investors looking to apportion some of their portfolios to short-term bonds have numerous options available. Besides mutual funds such as T. Rowe Price Short-Term Bond Fund (PRWBX), Vanguard Short-Term Bond Index Fund (VBIRX), and Lord Abbett Short Duration Income Fund (LALDX), you can find a growing selection of exchange-traded funds (ETFs) focusing on such short-term bonds.
Live a More Simplistic Lifestyle
A good practice to keep is limiting the use of credit as much as you possibly can. Here are a few things you can do to simplify your life.
♠ Reduce your debt.
Debt means that your creditors are in control. A simplistic lifestyle means that you are in control. Gaining control means getting rid of debt. Having a big mortgage payment, car payment, and credit card bill means losing your job will lead you to lose all those things you have been working so hard to pay off.
♠ Learn to live without credit.
You might think this is a hard thing to do. But if you were to ask your grandparents if they had credit cards, they will probably tell you "No." More than likely, they paid cash for everything. It's hard to imagine, but before credit cards existed, that is how people purchased the things they wanted.
If they didn't have it, they probably didn't feel they needed it. Once you face the burden of saving for something, not only do you respect it more once you have it, but you realize many things you don't need.
♠ Minimize your wants.
Getting rid of credit means minimizing your wants.
For example, do you really need 500 cable channels, most of which you don't watch anyway?
Or do you need a new car every two or three years?
How about eating out?
And what about cutting some of what you spend at the grocery store?
There are so many things we can live without to live more simplistic lives and save lots of money.
"For years we have been using our homes as an ATM machine. We would build up credit card debt, then remortgage our house to pay it off. We even saw one couple that did it five times in five years. They tried one last time, and the bank said “no.” Their incomes had fallen, and their house was fully mortgaged, so it is no longer possible for them to refinance and repay their high-interest credit card debts." -J. Douglas Hoyes, CA, LIT
© 2018 Russell William Fry