Poor Man Survival
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5 Warning Signs That a Recession Coming – And What You Can Do
It's not a question of "if" or even "when." It's also "why."
“Those who don't know history are doomed to repeat it." But sometimes I wonder if we don't take it seriously.
Take, for instance, an article I just saw on subprime mortgages. You remember subprime mortgages. Those were the mortgages that banks gave to borrowers who were likely to have trouble making payments. These mortgages blew up when the banks couldn't collect and had to foreclose. These mortgages caused housing prices to plummet. These mortgages also nearly caused the collapse of the banking system and the economy in 2008.
Well, they're back! According to an article by Steve Rhode, this time they're calling them "non-prime mortgages" and giving them out to people with a FICO score as low as 500.
Take, for instance, an article I just saw on subprime mortgages. You remember subprime mortgages. Those were the mortgages that banks gave to borrowers who were likely to have trouble making payments. These mortgages blew up when the banks couldn't collect and had to foreclose. These mortgages caused housing prices to plummet. These mortgages also nearly caused the collapse of the banking system and the economy in 2008.
Well, they're back! According to an article by Steve Rhode, this time they're calling them "non-prime mortgages" and giving them out to people with a FICO score as low as 500.
Predicting recessions is like predicting the weather. You can’t say exactly where and when the storm will hit, but you can get pretty close — and give people in its path time to prepare.
As a CPA, author, and financial counselor for more than two decades, I’ve seen my share of recessions big and small. Since my specialty is in helping people get out of debt, and since debt is what causes most recessions (think housing bubble), I can often see recessions coming. Like the weather service, I can’t give a specific time, but I can issue a storm warning…
‘On any given night, over half a million people in the U.S. are homeless, and half of them are elderly. There are 46 million Americans living at or below the poverty line, and 16 million children living in households without adequate access to food. Congress creates, on average, more than 50 new criminal laws each year. With more than 2 million Americans in prison, and close to 7 million adults in correctional care.’
5 Warning Signs That a Recession Coming – And What You Can Do
1. A credit card recession
Since the eve of the last recession, we've passed a scary milestone: Credit card debt has surpassed the $1 trillion mark.
To put it another way: If you added up all the balances on all the credit card statements in this country, it would total just over $1 trillion.
The last recession was sparked by a housing bubble. Homeowners couldn't afford to pay their mortgages. What happens if Americans can no longer afford their credit cards? That's a simplified question about a complex set of circumstances, but it's also keenly relevant to our current debt problems.
What goes up must one day come crashing down. How high can credit card debt go before it weakens all of our finances? If it doesn't directly cause a recession, it can surely be the last straw that pushes us into one.
If you have so much credit card debt that you can't pay it back, seek a free debt analysis from a nonprofit credit counseling agency immediately. You might be eligible for a debt management program, which can freeze fees and reduce monthly payments by up to 30 or even 50 percent.
2. A student loan recession
Remember what we said about credit card debt surpassing $1 trillion? It's even worse for student loans.
Total student loan debt is even higher: nearly $1.5 trillion. that's 10 percent of all the debt Americans owe. Already, student loans are such a problem, it's affecting home sales. According to the National Association of Realtors, more than a fourth of student loan borrowers "were delayed by at least two years in moving out of a family member’s home after college due to their student loans."
So even if student loans don't directly cause another recession and another housing crisis does, student loans could easily be a contributing factor.
If you have student loans you can't pay back, the federal government offers several programs that can reduce your monthly payments. Why? Because the government has a vested interest in you not defaulting on your loans — and causing national economic instability.
3. An "auto-matic" recession
The last recession was caused by a housing bubble. Will the next one be sparked by an auto bubble? Sound ridiculous? Forbes reported earlier this year, "outstanding auto loans and leases remain at or near record levels for volume."
As CNBC reported in April, "A combination of higher auto prices, longer loans and climbing interest rates means a buyer who finances their purchase could pay about $6,500 more than they would have five years ago."
While certainly not as catastrophic as the housing bubble, see No. 1 above — because Americans are now deeper in debt than they were a decade ago, so it'll take less to push the country into a recession.
Don't follow the herd and the trends. Take a pass on long-term and high-rate auto loans. Buy a used car you can afford. Your friends may laugh at you now, but the last laugh will be yours.
4. A retirement recession
The common rule is: You'll need around 70 percent of your pre-retirement income if you want to live well post-retirement. That includes your own savings plus Social Security. Guess how much Americans has saved up right now? A third has less than $5,000, says a new study from Northwestern Mutual. "One in five Americans (21 percent have NO retirement savings at all," the study says.
Remember the Obama-era bailouts to prevent homeowners and businesses from going under? Will we need a retiree bailout one day? How will families support their elders who can't afford to support themselves? Especially when those families are saddled with their own credit card bills, student loan balances, and auto loan terms?
If you have a 401(k) or similar program through work, sign up now. Many of these programs will match a percentage of your contributions. For instance: 25 cents for every dollar up to a certain amount. That's like opening a saving account and earning 25 percent interest! You can't get that in the stock market or with bitcoin.
5. A rampant recession
If I was forced to predict the cause of the next recession, I'm going with: all of the above. This country is facing such structural debt problems across so many categories, I can easily see any one of them pushing us into a recession — and all the others keeping us there for a long time. In fact, the prediction of which I'm most confident: A decade ago, we called it the Great Recession, but next time, it could be another Great Depression.
Change how you think abut money and what you do with it. That sounds impossible, but the fact is, unlike any other time in history, there's free advice that's proven and specific. You can find it right here on this website. Change now, if not for yourself, for your children — because either you or them is heading for a crisis not seen in almost a century.
EDITORS NOTE:
Goldman Sachs expects interest rates to rise by more than 1/2 percent in the next year. They base this forecast on the fact unemployment has been going down and that the federal government deficit has been going up at the same time. Since 1948 that's only happened twice (during the Korean and Vietnam wars).
What can smart readers do? Avoid taking a mortgage if your FICO score is below the mid-700s. Save first, and when your credit score improves, you'll be in the financial position to own and KEEP your home.
You can also be wise about any real estate investments. Historically, when lenders start stretching their rules, it means that we're nearing a market top (and a correction is on the horizon). So the time to move to a bigger, more expensive home is quickly fading. In fact, it might be time to sell that big house and buy something less expensive. Empty nesters ready to downsize perhaps?
The window is also closing on refinancing your mortgage or refinancing your auto loan. If you have any plans in that direction, you'll want to act soon.
Many people were caught by surprise in 2008, but others studied history and knew that the excesses of the previous years couldn't last without a correction. Let's be among those who are prepared for the next correction.
What can smart readers do? Avoid taking a mortgage if your FICO score is below the mid-700s. Save first, and when your credit score improves, you'll be in the financial position to own and KEEP your home.
You can also be wise about any real estate investments. Historically, when lenders start stretching their rules, it means that we're nearing a market top (and a correction is on the horizon). So the time to move to a bigger, more expensive home is quickly fading. In fact, it might be time to sell that big house and buy something less expensive. Empty nesters ready to downsize perhaps?
The window is also closing on refinancing your mortgage or refinancing your auto loan. If you have any plans in that direction, you'll want to act soon.
Many people were caught by surprise in 2008, but others studied history and knew that the excesses of the previous years couldn't last without a correction. Let's be among those who are prepared for the next correction.
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