In the light of what I said yesterday about the looming financial crisis, and what I added tonight, some readers have asked what steps they can take to protect themselves against what looks like it'll soon be coming down the pike. There are three scenarios here:
- Your income will grow at a rate equal to or greater than inflation, allowing you to keep pace with rising prices (and/or you earn so much excess income that you can afford to pay higher prices without worrying);
- Your income will not keep pace with inflation, meaning that you'll be able to afford less and less of the things you buy today;
- You're dependent on savings and investments, the value of which (and the interest on or dividends earned by them) may be eroded by inflation.
In the first case, you basically carry on as normal. You won't be too badly affected by the crisis. Unfortunately, I suspect most of my readers (not to mention myself) don't fall into this category.
In the second and third cases, which probably encompass most of us, we have some hard choices to make. The sooner we make them, and the sooner we start acting on them, the better off we'll be. They include (but are not limited to);
- Paying off debt that will grow with inflation (i.e. high-interest-rate and flexible-interest-rate debt, like credit cards, where issuers will simply ratchet up the interest rates as inflation bites deeper, so that our indebtedness becomes ever harder to pay off).
- In contrast, it's better not to pay off current long-term debts that have a fixed rate of interest (e.g. a fixed-rate housing note). Their interest rate won't rise with inflation, and we'll be able to pay off what we owe using inflated (i.e. less valuable) dollars in future. (Note my emphasis on current long-term debt. Future long-term debt will probably have variable interest rates, so that lenders can keep up with inflation, and will therefore be worth paying off as quickly as possible.)
- Savings become problematic in a high-inflation environment. Short-term savings, for emergencies or unforeseen expenses, are of course a necessity, even if their minuscule interest rate doesn't keep pace with inflation. Longer-term savings may not do well using normal financial instruments. You want to preserve the value of your capital, and have it appreciate (if possible) to match or beat inflation. Right now, hard assets such as gold, platinum, etc. are doing very well in this regard; but that may not always be the case. If you can afford it, I'd say put as much as you can spare into hard assets right now, and keep it for the long term. When I say 'hard assets', I mean the physical stuff itself - gold coins, for example. Don't buy pieces of paper entitling you to a store of gold in someone else's vault. Who knows whether it'll be there when you want it?
- Avoid taking on long-term variable-interest-rate debt for short-term assets. For example, it makes no sense to take out a 60-month-plus loan to buy a motor vehicle that will be valued at less than half its purchase price at the end of the loan period. It makes much more sense to buy a used vehicle, new enough to be reliable, but old enough to have suffered the worst of the initial depreciation, and to finance it with a shorter-term loan (or, if possible, pay cash for it).
- Buy assets you can maintain yourself, as far as possible. If you buy an expensive vehicle with computerized everything, that means you can't do much to maintain it at home - it'll need a computerized service facility every time. A simpler vehicle is easier to maintain. (I know one man who runs a couple of 1980's-vintage pickups, and is looking for a third right now. They may use more gas than a modern economy car, but he can maintain them in his back yard, and parts are easy to find in scrapyards, etc. He saves an enormous amount by not making payments on new cars, or paying commercial service charges.)
- Try to replace purchase transactions with barter whenever possible. For example, what food can you raise for yourself in a small vegetable patch in your back yard? If you grow things like corn, or carrots, or potatoes, can you swap your excess crops for tomatoes, or cabbages, or beans, grown by someone else? You may not be allowed to keep hens in your back yard due to municipal noise regulations, but what about meat rabbits? If you can keep a dozen of them, and slaughter them yourself (it's not too difficult), could you swap some of the meat (and perhaps the pelts) for eggs or chicken meat from someone who lives in an area where it's legal to keep them? It's worth building a network of like-minded friends and relatives who can help each other in this way. Vegetable scraps from one or more homes can help feed your meat rabbits, in exchange for some of the meat at a later stage. Your rabbits' droppings can feed someone else's chickens. Everybody wins.
- Learn to do as many routine maintenance and repair jobs as you can. If you can avoid having to pay for an auto mechanic to change your vehicle's engine oil, or a licensed HVAC technician to clean out your house's ducts, or a plumber to replace a tap or install a new toilet, you can save hundreds of dollars over the course of a year. If you have the aforementioned network of friends, why not each learn one thing, and swap services between yourselves? One can be a group plumber, another a mechanic, and so on.
- The same applies to domestic chores. Form a group who can help one another - particularly if some have particular aptitudes or skills that others lack. For example, I'm partly disabled. I can't do heavy housework - or at least not a lot of it at one time - but I can do small tasks. I can cook - fairly well, according to my wife and friends - and wash dishes or do laundry. If I do those things for others, I can ask them to help me with heavier work where my fused spine, nerve damage and other physical problems would handicap me.
- In general, I strongly recommend adopting a simpler, more cost-effective lifestyle. Decide what's essential for you, and concentrate on those things. Peripheral things, occupations and hobbies and activities that take up time and space and resources but which aren't central to who and what you are, should have a lower priority, or even be shelved altogether as being unaffordable.
- Try to be discreet. If you have it, and flaunt it, when others can't afford it, there will be those who'll be tempted to take it away from you. That puts you and your family at risk. Rather don't display your wealth, or your possessions - and be prepared to defend them if necessary.
- What about your children? If they're about to go to college, I'm not sure I'd allow them to take out massive study loans, or spend a great deal of money on their education, unless this was unavoidable. Check out the many free courses available online (e.g. at MIT); see what a community college has to offer at much lower rates than a mainstream university; supplement local courses with video or Internet offerings; consider overseas institutions such as the Open University in England or the University of South Africa, where entire degrees from undergraduate to Doctorate levels are available via distance education at very reasonable costs. (I have two degrees from the latter institution, and consider them fully the equal of their equivalents at any US university I've encountered.)
These are a few ideas. I'm sure readers can contribute many of their own. If you have some good ones, please let us hear them in Comments.