The Trickle-Down Effect on You
What a rough couple of months this has been for the U.S. financial sector. All these big companies going down the shooter (well, you know what I really mean), and these were companies we thought could never tank. A few weeks ago it was Bear Stearns, then it was Fannie Mae and Freddie Mac. Just this week, there were another two “problem children;” Lehman Brothers, the so-called world famous “investment advisors,” and American International Group, the largest insurance company in the world – both of them, busted.
It’s really kind of scary, when you think of it. These are supposed to be “experts” and “captains of industry” and they can’t manage their company’s finances any better than we can handle our own debt.
But, many of you probably heard the news of these last two and thought to yourself, “For once, I’m glad that I don’t have any money to invest” or “I don’t have anything worth insuring, anyway.” Your logical thinking is that it doesn’t really affect the little guy.
Unfortunately, the downfall of all of these bankrupt and poorly managed companies has really far-reaching implications, even more than you can imagine. Wage earners with 401(k) plans may have investments in those companies, because they were considered “solid.” What about your pension plan – plan investors put money into those stocks. A lot of people count on the stability of their stock prices, and now they’re worth a heck of a lot less than they were not that long ago.
The devalued stock price will have a trickle down effect – banks’ net worth will decrease, and they’ll have less money to lend out. The existing liquidity crunch in the economy is going to get crunchier. It will be harder to get a loan, personal or commercial. For a company that was relying on credit to expand or continue operations, it may mean stagnation or even lay-offs.
The liquidity crunch and the bank takeovers might also mean that your credit cards will have reduced limits. You may get a notice from your bank that they’re consolidating, and as a result they’re reducing your credit availability, and they will “ask” you to pay down your credit card to your new maximum. So, the money you thought you had available for a rainy day, might not be there after all.
If you’ve got a 401(k) plan at work, you might want to reconsider where you are putting your distributions. One trap a lot of people fall into is that they tend to stick with what they think they know best. For example, let’s say you work at that big national bank – Watch-Over-Ya, which I know offers a 401(k) plan to its employees. You might think that saving with a 401(k) plan is a good idea – and it is, but not if you put all of your distributions towards Watch-Over-Ya stock. Because, what if? I don’t need to elaborate on that, do I?
If you can manage to save some money in your company’s 401(k) plan, a bank savings account, or even in your piggy bank, there’s no time like the present. The economy is not going to get any better any time soon, from all indications. It was recently announced that the U.S. Treasury is going to auction off U.S. bonds to raise money… think about how and why you might use eBay. It’s not always to get rid of the gee-gaws and what-nots that you’ve collected over the years; it’s to get a little cash. Same difference.
When money is tight, you’ve got to do what you’ve got to do, just to stay afloat. And money is going to get tighter in the coming months. Brace yourself, it’s gonna be a bumpy ride.