How to Prepare for an Economic Depression
Everyone’s afraid of something: being audited by the IRS, the loss of a job or even a house. With the economic troubles of the last few years, many Americans are starting to worry about another economic depression like the one of the 1930’s. Few of us may remember it, but many of us have been shaped economically by our grandparents’ or parents’ recollections of that bleak time.
Are we heading for another Great Depression? No one, not even prize-winning economists, knows for sure. Depressions are characterized by abnormally high unemployment, widespread bank failures and bankruptcies. Before the Great Depression, all business downturns were called depressions. Economists started calling weak economies "recessions" after the Great Depression, because they didn't want to terrify the public and negatively affect the stock market.
The term "depression" also carries the connotation of deflation, or a sharp decline in prices. And you don’t have to look far to see that housing and stock prices have suffered drastic declines in the past two years.
How to prepare for an economic depression financially—and psychologically
When the specter of depression looms, debts become harder to pay off, because income may lower or disappear entirely. As a result, as income becomes scarcer, it becomes more valuable, has more buying power.
Pay down your debts.
Your rate of return from paying off a debt is the interest rate you pay. So if you have $10,000 in credit card debt with a 20% APR, paying off the card will give you a 20% return — try getting that return in the market!
Plus, in this example, paying off your debt
will give you about $200 a month more in income.
Next, build up savings.
If you do lose your job, you’ll have a great headstart on keeping your mortgage going if you’ve stashed away some cash, or put it in a liquid bank account.
We’re not advocating that anyone panic. But if you are the type to worry, rather than losing sleep, it makes sense to do what you can to build security by paying down debt and building up savings.
Now that you know more about how to prepare for an economic depression, get your credit report & score.