People of a certain age in the UK will recall the last few financial downturns over the past few decades. We all recall the major banking crisis of 2008 when many of the big investment banks went to the wall after having gambled away billions. Then we had the collapse of the dot.com bubble in 2001 when we saw some websites that had not turned over a penny in profit being valued in the billions collapse into nothing more than disk space on some server formatting peoples life savings. In the nineties again we had to weather the financial storm when the markets crashed, over and over again.
It is a fact of life that our western economy goes in cycles of boom and bust, no one can deny it and anyone who claims that another financial crisis of the likes we saw in 2008 will never happen again are hoping against reason and history.
The next financial crisis is only a matter of time, the question is are you prepared to see it through to the other side?
With some preparation you can sleep easy at night that you and your family will ride the next banking fiasco out in some resemblance of normality. So, read on to see how you can amour plate yourself for the next downturn in the economy.
No one, well no one normal likes facing uncertainty and the unknown. We humans like stability and consistency and the mere mention that there is a financial crisis looming just over the horizon will have you labelled a fear monger or conspiracy nutjob. The problem is that no one really knows when exactly the next financial crisis will happen all it takes to scare the markets is bad news and rumors and like a pack of dumb wildebeest that are startled by a real or imagined threat will stampede. The same goes for financial markets, once a large investor makes a move the other large players will also follow, then the smaller investors follow the trend, hence the term “The trend is your friend”, if the fear is strong enough the markets will stampede over the cliff as every man and his dog tries to sell to get out of the market driving prices down hence the term price crash.
But you may ask what is the threat? Well, in 2008 when we saw a crisis which started in 2007 in the United States with subprime mortgages which spread across the world that led to the collapse of the investment bank Lehman Brothers.
It was these subprime mortgages which were high risk loans that led to many of the banks around the world having to be bailout by their respective governments to the tune of billions. After this financial crisis banks were forced to introduce new systems which created a partition between their investment and their retail banking divisions.
Many people have said that this subprime mortgage issue was just the tip of the iceberg and other more serious problems where just waiting to come to light. Let’s look at why some financial experts are claiming that the next one is coming, why you ought to prepare yourself and the best way to protect yourself.
The Next Financial Crisis: Is It on Its Way?
What drives the economy? Ask yourself this question? Is it the banks? Is it governments? Or is it the man and women of the street?
The answer is simple, what drives the economy is us, you and me. We the unwashed masses, the commoners have the power to either cause the economy to thrive or to die. How, you may ask, well the answer is simple. The economy is a closed system like your body’s circulation, if the heart stops pumping blood then we die, likewise if we stop spending money the economy dies.
Shops can only keep people employed if they sell, who do they sell to? they sell to the likes of you and me. Shops purchase their goods from factories who create the products who also employ people, these factories can only produce if shops order from them and shops can only sell if you buy from them.
It is a closed loop and so elementary that a child understands it. Money just goes around in a circle, we work, we get paid, we spend and around it goes. But in recent years that flow of money has started to slow down. The CBI‘s monthly survey of the UK retail sector in October, which indicated that retail sales had shown their steepest decline since 2008-9.
Why are we not spending as much? It could be that UK household debt as reached over £200 billion. This has put the banks on alert to people defaulting and made them more aware of risk and therefore more wary of lending.
Continuing uncertainty surrounding Brexit does not help either with years of our government not making it clear to businesses where they stand in relation to the E.U has lend to international markets to view the UK as higher risk which adds fuel to the fire that we are headed for another financial crisis.
Why You Should Prepare Yourself for Financial Crisis
Like a tsunami the last few financial crises swept all before it. Firms went out of business putting thousands of people out of work or if firms were able to hang on, they did so only by slashing prices and freezing wages. This caused people to worry about their finances which of course you guessed it they spent less on things other than the bare necessities and the cycle starts to slow down.
If banks, then raise their interest rates leading to more pressure on UK citizens meaning even less money going into the economy and into the banks coffers. This is one reason that the Bank of England has maintained interest rates at all time lows to stimulate the economy and the only way to do that is to put more money into the pockets of the man and woman on the street.
Raising Taxes also has the same effect. High taxes lead to a slow down in the economy as people have less money to spend. If the UK government really wanted to kick start the engine of the UK economy in 2008 they ought to have taken these steps:
Rather than bail out the banks they ought to have given the money directly to the people
- Slash taxes to the bare bones, reduce VAT to a couple of percent.
- Income tax should have been frozen at 10% for 3 years.
- Corporation tax reduced to 0% for any business with a turnover over of less than £1 million and 10% for all other business.
- Make public services efficient and accountable for every penny they spend.
More money in the system means more blood for the heart to pump. Giving money to the banks was incorrect.
Since our governments are run by the ignorant and the corrupt for the benefit of their financial masters how do you protect yourself against the greed and stupidity of the banks and governments.
The Benefits of Drawing up a Budget
Have you asked yourself how much you need to live on each month? What I mean by that is if you were to cut out everything other than the essentials like food, water, council tax, mortgage etc. How much do you need to live on?
Now, do this try to live on that budget for the next few months and put all the excess money to one side. Start to build up your financial reserves. You will want to put at least 10% of everything you earn to one side and do not touch it. You’ll discover that you’ll enjoy the knowledge of having money in reserve for when you really need it.
You want to build up your cash reserves to a point that you can survive for at least 2 years with no work. This is easier than people claim provided you start as soon as possible. Do not be tempted to spend money unless absolutely required. No more drinks out with the lads or girls, no more expensive takeaways, no more fancy holidays. You must be single minded in your pursuit in achieving that 2-year cushion. Once you achieve it, you’ll find that you’ll want to continue.
Look at your mobile phone contract, your utility bills, your shopping bills, start to shop around and keep an eye on every penny. Just remember that when the next financial crisis happens your government will be too busy helping the banks with billions in bailouts and not about you, time to take care of yourself.
Would I advise in keeping money in the bank? Yes, unless you have a safe place to can store the cash put it in the bank. If you do keep the money at home do not tell anyone what you are doing. Once that money starts to build up you won’t need to rely on short-term payday loans again.
Could you Earn Extra?
If you want to increase the rate at which you build up your cash reserves you could look at taking on additional work. Or you could think about starting an online business.
If you have a spare room, you could use a service like Airbnb to rent it out which allows you to earn up to £7,500 per year tax free.
Do you have any items you no longer need which you can sell on eBay? Think about all your friends and family, they will have lots of stuff that are cluttering up their homes that you could offer to sell for a percentage. This is a great way to start having additional sources of income to add to your cash reserves.
Plan for Rises in the Interest Rate
When I was a kid, I saw mortgage interest rates go up to 15%, my parents had to use every penny to repay the mortgage. That set an idea in my head that if ever I was to take out a mortgage I would only do so if I could afford to repay twice the mortgage amount. I was never going to ever take out any finance unless I could afford it.
Now that I am older, I have kept that promise. I advise everyone that when they take out any mortgage that they budget for double the mortgage payments per month. To make those payments into a separate mortgage bank account. This way if the banks do increase the interest rates then my mortgage bank account has enough reserves in there that I am not caught unprepared.
If you can overpay your mortgage each time you renew then even better, lower repayments each month, more money in your pocket. Although some would argue it would be better to use that money to buy another property to rent out.
Money will either make or break you. You can either decide that you want to sleep easy at night or lay awake worrying. The next financial crisis is a matter of when not if. We do not know when it will happen but why wait. Start preparing now before you get swept away in the tsunami with all of the other people that did not plan for the future and amour plate themselves against the stupidity of over “leaders”