Personal Finance Choices and Economic Fears

Rarely does a day go by when I’m not contacted by a reader who is alarmed about some economic fear or another. What about inflation? What about deflation? What about precious metals? What about national bankruptcy? The list goes on and on.

Right off the bat, let’s make it clear that I don’t buy such apocalyptic feelings. I believe that the only thing we have to fear is fear itself, with perhaps a slight addition of fearing the consequences of our own personal mistakes.

Most of the time, these individuals ask me for what they can do with their money to protect it against the calamity they most fear. Should they buy gold? Should they put it in an overseas bank that’s based in euros? What should they do?

I usually offer these concerned people the same advice over and over, so I’ll just summarize it here. (I’m often amazed how many posts I write so that I can simply send a link in response to a common question.)

First of all, don’t panic. Never, ever make a quick and hasty decision about your money, especially based on information that comes just from a source or two. If you’re going to make a major shift with what you’re doing with your money,

Second of all, be strongly suspicious of any news or information coupled with a sales pitch for an investment. Never, ever trust the word of a salesman completely. Take the information provided and do your own research, every single time.

Still, that doesn’t address specific investment advice. Here’s what I would do if I were worried about such things.

First, I would eliminate all debts. Regardless of what happens to the economy, it’s never a good idea to be financially beholden to a lending institution. Get yourself completely out of debt. Start with your highest interest debt and pay it down rapidly, then move down the list. If a debt is adjustable, give it a bit of priority (say, a percent or two).

Second, invest in yourself. Make sure you have a well-rounded education. Also, make sure that you have a skill set that will come in handy no matter what happens. Time management skills. Information management skills. Leadership skills. Basic home and auto maintenance skills. These things always come in handy, both personally and professionally.

Third, invest in the short-term future. Buy items in bulk, particularly when they’re on sale. Make sure you have supplies on hand to deal with many personal emergencies. Keep an emergency fund at a local bank.

If you have all of these on hand, you’re in far better shape than most people. The best thing you can do with your remaining investment money is to diversify, diversify, diversify. Don’t put all of your money into one pot, ever. Own some domestic stocks and some international stocks via index funds. Own a bit of land. Have money invested purely in cash (like a savings account), and there’s no reason not to own a bit of some foreign currencies, too. The key is to diversify widely so that if one market or one economy or one particular company has a crisis, you won’t lose everything. Sure, you won’t be able to ride the rocketship that is a wildly accelerating stock, but you gain a great deal of security from your diversity.

Here’s the kicker, though. This is the same exact advice I’d give to anyone, whether they were worried about financial apocalypse or not. That’s because sound personal finance principles work when the economy is booming or when it’s faltering. They work when things look great and when they look desperate. People only get into scary situations when they abandon basic principles.

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  1. krantcents says:

    For me, savings is the most important financial principle to follow. When you have savings, you have choices and opportunities open up to go further.

  2. Steven says:

    “If you’re going to make a major shift with what you’re doing with your money,”

    Nugget of wisdom omitted for your philosophical enjoyment! ;-)

  3. Great tips Trent. I think the most frustrating thing about it is the amount of time it takes to do these things. Trying to get out of debt, building an emergency fund, preparing a stock pile, it’s definitely difficult to do it in a short amount of time.

  4. AnnJo says:

    On where to keep emergency funds: Supporting your local banks isn’t a bad thing, but emergency money should be accessible is ALL emergencies, including local or regional disasters, so that means you should have enough in cash (literal cash – in your pocket, mattress or home safe) to allow you to evacuate, if needed, and enough in national banks that will be accessible from out of town, if you have had to evacuate. Keeping it in a “local” bank might not allow that.

    There’s one point Trent makes that I think is somewhat wishful thinking. “People only get into scary situations when they abandon basic principles.” This may be true on a micro scale, but wise personal finance management will not prevent “scary situations” brought on by natural or man-made disasters or by a country’s abandonment of basic principles on a macro scale.

    The worried people who write to Trent are worrying about those macro issues – about their country living on unsound economic principles and the effect that will have on them – and Trent’s advice is for them individually to live soundly. This is good advice as far as it goes, but doesn’t address those worries.

    Unfortunately, the answer to those worries is that, other than voting wisely, maintaining diversified investments, and possibly relocating, we have little individual control over those macro forces.

    Trent’s advice is along the lines of “Don’t worry, apocalypses don’t happen.” Actually, they do. Better advice might be: “Don’t worry because worrying is bad for your health and accomplishes nothing. Do what you can to prepare for the scenarios you are concerned about, remain observant, don’t be panicked but substitute analysis for fear, vote wisely, and be willing and able to change course as circumstances demand. Pray if that is your thing, and hope to be lucky.”

  5. Agree with @AnnJo’s last paragraph. History shows “apocalypses” happen. Don’t be afraid of them though, analyze and plan for some contingencies. Always diversify.

  6. JuliB says:

    If you read survivor stories (be it floods, tornadoes, earthquakes, snowstorms, etc), most people advise ensuring that you have enough cash on hand for when the power is out – some places will be open and selling things.

    Also – develop a pantry so you can skip at least 2 weeks of grocery shopping. You may never need to do so, but it’s better to have it and not need it, then to need it.

    The gov’t recommends having 2 weeks’ of food and water. I would recommend a lot more food. I’ve read many stories on frugal blogs where unemployment hit, and people found great solace in their food storage.

    Steve Forbes has been railing against the weak dollar policy of both Bush and Obama for many years now.

    In addition, freeze dried fruit is awesome. I buy a variety from emergencyessentials.com and supplement my cereal / oatmeal with them. Not cheap, but makes it a whole lot tastier!

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