The headline news out of Washington and New York's Financial District last week does not bode well for the near-term future of the U.S. economy. While it may seem that recent events on Wall Street have little direct affect on your life at the moment, you are likely to feel the effects soon. A lot of unknowns remain, but last week's events made clear that there are a few steps you should immediately consider taking.
Dump money market funds. Largely unnoticed among all of last week's bad news in the financial markets was that for only the second time in U.S. history, a money market fund called Primary Fund ended up losing money, an event it blamed on the collapse of Lehman Brothers. Other money market funds also incurred losses due to Lehman Brothers' bankruptcy, but unlike Primary Fund, they took actions internally so that their money market funds didn't go into the red.
Money market funds have been considered a safe place to park cash with little risk. In previous years they were a preferred investment vehicle for money that needed to be in a liquid account because they tended to pay higher interest rates than bank savings accounts. That has not been the case this year, but many people still have money sitting in money market fund accounts from past years.
Money market funds are essentially mutual funds that hold short-term debt investments. These are usually highly liquid investments such as government securities, certificates of deposit and asset-backed commercial paper. However, because they are not insured by the Federal Deposit Insurance Corporation (FDIC), when they lose money, investors are not protected. Since they pay little and the perceived low risk is no longer valid, it makes little sense to keep money in money market funds. Instead, consider placing it into an online banking account where it will earn more without the risk.
It's important for consumers to know the difference between a money market fund and a money market account. A money market account is an interest-earning savings account that comes with FDIC insurance. With a money market account, even if the bank goes bankrupt, the money in the account is safe as long as it falls under specified limits -- up to $100,000 per account and up to $250,000 for some retirement accounts.
Don't rely on credit cards. For those who have been paying off debt and even those who pay off their credit cards in full each month, it has become more common to rely on credit cards as a sort of emergency fund. The strategy is simple. If there is an emergency, it can be placed on the credit card until the money can be taken out of other investments to pay it off. In this way, the money can be placed in investment instruments that produce a higher yield than a savings account.
The problem with this strategy, however, is that with the worsening banking crisis, banks are tightening credit and will likely continue to do so. Many people, even with good credit, will find that their credit card limits will be reduced and it's even possible that some accounts will be closed altogether. The ease with which credit cards have been obtained in the past will likely dry up, meaning that the credit card funds that you may assume are available might not be there in an emergency. If you have been placing your emergency fund in non-liquid investments to try to earn a better yield, you might want to consider placing them in more liquid assets for the time being.
Increase your emergency fund. It's also a good time to look at your emergency fund and decide if it needs to be expanded. Most people should feel a bit more concerned about their employment with the current economic conditions. With this in mind, it's in most people's best interest to have a little extra tucked away just in case. If you don't have a personal emergency fund, it's time to begin one right away.
Update your career basics. The poor economy is going to take its toll on companies, and most people know that there is no longer a guarantee of a secure job. Now is a great time to work on all the little things that can improve your career.
Take the time to make sure your resume is up to date and look into job related training that will make you a more valuable asset to the company. Doing the little things that make you an important asset to your company will increase your chances of keeping you job if there are layoffs and in finding a new job if you happen to lose your job.
Start working on alternative income sources. Since there is going to be some economic turmoil for the near future, now is the time to begin finding some alternative income sources. There are a number of part-time businesses that cost little to no money to begin
By laying the groundwork now and getting alternative sources of income in line, you will be in a much better financial position if the unfortunate happens and you do lose your job. Even if you don't, you'll still come out ahead. You can use the extra money earned to turbo-charge your retirement savings or put it toward other financial goals. You will also have the security of knowing that you have an alternative income stream that you can count on beyond your regular take-home pay.
It's important to keep your eyes open to what is happening to the economy and how these events may affect you. By remaining proactive and predicting how the events may affect you, you can take the needed steps to best protect your personal finances even during these uncertain economic times.