Preparing for a Financial Winter

Today, we’ll discuss an important topic: real economic depressions. I call them Financial Winters. Economic depressions are an uncomfortable topic to discuss. However, they are important to understand and prepare for.

We live in difficult and unprecedented times. The global pandemic and recession continue. In spite of many changes to the workplace and financial landscape, there are other changes still unfolding. Some of these changes may affect our economy negatively.

The U.S. Federal government continues to borrow and spend in order to stave off a deeper economic recession. The U.S. Federal Reserve continues to create more money through policies of quantitative easing. As much as these policies support prices and investments, borrowing and money creation do not create real wealth.

We undeniably face a massive financial crisis. One far bigger than the economic winter brought on by COVID-19. Fiscal stimulus, deficit spending, and money creation will end at some point. When they do, this will result in a future economic crisis of monumental proportions.

How a future crisis will unfold is not clear. It could unfold in a number of ways, and we want to make sure we protect ourselves.

One way a future crisis could unfold is that the Federal Reserve could raise interest rates and push the economy into a deflationary depression. If that happened, you would want your money in cash.

The Federal government could try to do a structured default on its debt.

The Federal government and Federal Reserve could also try to devalue the currency. This could result in inflation. In this case you would want to have your money in hard assets like commodities and businesses like food, energy and healthcare.

My primary point with describing these scenarios is to educate you. We face a crisis, but how it unfolds is difficult to predict.

There are steps you can take to prepare yourself for any crisis. You can do this in a way that does not dramatically affect you right now, but could potentially make a positive difference for you and your family in the future.

Here are five steps to prepare for a real economic depression:

1. Create additional income. During an economic depression, jobs disappear. Having an emergency fund of at least one year of living expenses is important. You should also set up an additional source of income to supplement your primary job. This could be a side hustle, a separate business, affiliate marketing, or a trade of some kind you can do for neighbors. Even if your additional income declines in a depression, you will have some income.

One method I’ve found to be successful at helping friends and clients increase their income is through Paid Social Media Jobs

This program enables you to work from home at your pace. If you are good with social media, you can make money posting for businesses. This can supplement your income.

Another method is through affiliate marketing. Twelve Minute Affiliate is a great starting point for learning more about affiliate marketing and the opportunities to earn additional income.

2. Own Foreign Stocks. For those who want to be diversified, this is always a good idea. Never have all of your money in one country. This is a principle of diversification. It applies during the good times and the bad. You can put all of your money in one country, just like you can put all of your money in one stock. But you increase your risk doing that. If you guess it right, you can make a lot of money. If you guess it wrong, you can lose everything. If the US economy declined, it would certainly hurt the rest of the world, but that would not necessarily mean other economies would collapse, too. In fact, historical evidence strongly suggests they would not. That’s why I suggest diversifying your holdings into foreign stocks too, including emerging markets. The best way to hold them is through low-cost index funds and exchange traded funds (ETF).

3. Own some precious metals. I always recommend physical ownership of some gold and silver. I recommend this over ETFs. Physical ownership involves less risk and more flexibility. Never put all your money in gold or silver. If you want to be properly diversified, never put all your money in one stock, one asset, or one country. The most I’ve ever recommended is 25% of your portfolio. For most young people with a long time horizon, I recommend 10%. If young investors have 10% in precious metals, 35% in foreign equities, and 55% in US equities, their investments will still do well if there is an economic collapse. And, if the US economy does fine and rebounds, they’re still going to be okay and receive a decent return on their investments.

4. Have some cash on hand. Having physical cash as part of your emergency fund is a good idea. This serves you even in times of natural disaster or local civil unrest. Even though cash doesn’t earn you a return, it’s good to have some so that if you have difficulty getting cash from a bank or ATM, you still have enough to last you for a period of time.

5. Have some food on hand. Having some food on hand can save you some time, money and risk if you need it. Growing food in your own garden or stocking up on canned goods could make a big difference for you if getting access to food becomes temporarily more difficult.

Preparing for a depression is an important endeavor.

Don’t forget to pick up copies of The Money MissionTax Saving Strategies and The Blended Retirement System.

Have a great weekend, stay safe, and I’ll talk to you again very soon!

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