How You Can Survive the Credit Crisis

Stack of Cash
I recently ran across several statistics that blew my mind. According to the Federal Reserve, US household debt stands at $2.5 trillion dollars. When you included mortgages the number swells to $13.6 trillion dollars. Most of us cannot even fathom that much money, but you don’t have to. Just keep your eye on your own situation.

Here are some ideas to help you get through and survive the current credit crisis:

Don’t think of your home as an ATM. Just because you’ve built up some equity doesn’t mean you should tap into it. Allow this asset to grow in value as you reduce the principle you own on it. If market conditions in your area are exerting downward pressure on your home’s value, don’t panic. Real estate is a long term investment.

If you’re looking to buy a home, bear in mind that may lenders have shut the doors on the easy money. Gone are the days of no document loans. Say hello to 30% down, yes thirty percent. Mortgage behemoths Fannie Mae and Freddie Mac have learned some painful lessons and are raising fees on borrowers who put down small amounts. You probably won’t be able to get a loan with anything less than 10% unless you have stellar credit.

Pay off your consumer debt. The Federal Reserve estimates that paying off your credit card locks in a 14.4% return. Where else can you get a return like THAT? After you pay it off, invest your payments into a diversified fund or into an ETF you understand and your returns will go even higher.

If you have a say in where your retirement funds are allocated, you might consider mutual funds or ETFs that feature large dividends. Another hedge is to use funds that concentrate on companies with conservative balance sheets or companies that focus on consumables. No matter how bad the credit crisis gets, my wife is going to wash her hair.

If you’re saving for your children’s college tuition, be prepared to pay for it with grants, scholarships, or 529 college savings plans rather than student loans. Sallie Mae has recently filed a regulatory notice that it will be more selective in its loan originations.

It looks like the current credit crisis (which could be with us through 2011), could force people to do what financial planners have been urging for years: cut your consumer debt, make sure your investments compensate you for the amount of risk they have, and have the patience to wait it out.

[tags]credit crisis, risk, debt, Freddie Mac, Fannie Mae, Sallie Mae, college tuition, retirement, credit cards, equity, consumer debt[/tags]

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