Pimp Your Finances

If you’re young, the downtrodden economy isn’t a bad thing, despite what the media would have you believe.

I’m not the only one who agrees. Liz Pullam Weston just wrote a great article about how if you’re under 35, you should be happy about the meltdown:

If you’re young… the biggest threat to your future isn’t the current crisis. Your greatest risk is that fear will cause you to miss some once-in-a-lifetime opportunities.

And she’s right. The job market sucks right now, but other than that, there’s not much of a downside to this economy for us young folk.

Chances are that we’ve lost much less than others, because we have less invested in stocks. Even though the market is down, I’m breaking even after the employer match on my 401K.

What else should we be happy about and taking advantage of? Let’s see what Liz thinks.

Stocks are on sale

Past performance is not an indicator of future performance, but if it gives us any clues, the market will eventually recover. It may take some time, but we can afford to wait.

We’ve a long time away from retirement – probably at least 30 years. Over the history of the S&P 500, it has never lost money over any 30 year period. Even if you started investing in 1928, you still would’ve made 8.47% if you stayed in the game for 30 years.

Although there’s no guarentee that it will come back, the S&P 500 has fallen more than 50% off from its peak. I feel like I’m getting a discount. I’m buying the same stocks (through low-expense index funds of course) that I was a year ago, only now they’re 25-50% cheaper. I think that’s a great deal.

I know that the market may never recover. But I don’t buy it. If the US and global economy really do collapse, what could we really do about it, other than stock up on gold and guns and settle disputes in the thunderdome? We’ve got to put our money somewhere.

Forget toxic debt. Where’s the bailout for post-apocalyptic families?

Houses are on sale

According to the S&P / Case-Shiller price indices, home prices are down 26% across the board from their peaks in 2006, and may be down as much as 40% in some areas. While this puts sellers in an awful predicament, it’s a great time to be buying (assuming you can get credit

Credit is tight again

How is this a good thing? People and corporations are finally being realistic. They’re not as willing to let people borrow themselves into debtor’s prison, be it through mortgages or credit cards.

People are borrowing less…the savings rate jumped to 5% recently (a record high). So hopefully, when things finally do turn around, it will be sustainable for the long run.

How to take advantage of it

Work on your credit score

Hopefully you’re starting from scratch, and don’t have many blemishes on your credit report. Even if you do, it’s more important than ever to have a good credit score.

Make sure you know where your credit score comes from!

• 35% comes from your history of making payments on time.
• 30% comes from your debt/credit ratio – the amount of debt you have compared to your limits.
• 15% is from the age of your open accounts, so make sure to keep the cards you’ve had the longest.
• 10% comes from the frequency that you apply for credit, so don’t try to get any new cards/loans before you start shopping for house or car news.
• The last 10% froms from a variety of factors, such as the types of credit you hold. It’s better to have a mix of things like car loans, credit cards, and consumer cards at stores than it is just to have one type of debt.

Get in the habbit of saving

No matter what your goals are, you should have a cash reserve.

It helps in the short term, in case you face unexpected expenses like car repairs. It also helps in the long term.

If you lose your job or get sick, having an emegency fund could be the difference between keeping your house and getting evicted. At the very least, it could keep you from going into debt any time you’re short on cash.

Pay your credit card balances in full

You should always be doing this anyway, but it’s even more important now. Many cards are jacking up their rates, so you could find yourself paying even more for impulse purchases.

My addition – learn from your mistakes

This wasn’t on the original list, but it’s important to try to learn from your mistakes, as well as the mistakes of others.

Are you happy with your finances right now? Are you worried about the economy? About your job?

Never forget that. And start making plans so that the next time the economy crashes, you’ll be ready for it.

Here are my mistakes, and things I’ll have ready for the next time:

• I won’t have any credit card debt
• I’ll have an emergency fund with at least six months of expenses saved up
• I’ll have more money available to invest, so I can take advantages of the low, low prices
• I’ll be the one making money from the crash, not the one losing sleep over it

Many people feel helpless, and wished they lived in different times. But that’s not possible. In the words of someones much wiser than me:

So do I… and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.

- Gandalf