If it feels like the mists of crisis are lifting... that's the best time to prepare for the next pea-soup fog.
Right now, the U.S. is opening up again as folks get the COVID-19 vaccine... The U.S. stock markets are flirting with all-time highs... People are buying houses like the world's running out of lumber... And the economy is surging back to life, thanks to pent-up demand and stimulus cash burning a hole in the collective American pocket.
The best time to prepare for crisis is when things are good. And when I say "crisis," I'm talking about uncertainty, volatility, asset price collapses, and, of course, pandemics. You want to have an umbrella before it starts to rain... rather than winding up drenched or paying top dollar to an enterprising sidewalk umbrella vendor.
You want to lay the groundwork to thrive when there's no crisis on the horizon.
So today, I will share five steps you can take now to prepare yourself for the next crisis...
- Anticipate the abnormal.
One of our biggest enemies in preparing for the unexpected is the assumption that things will be pretty similar tomorrow...
This is called normalcy bias. It's the tendency for people to think that the future will operate much like the past. The danger here is that we don't think much about what could be different, how it could change our lives, or how to prepare for that possibility.
You can't anticipate everything that could go wrong. But just thinking about it will help you prepare for when things actually do go pear-shaped.
One way to do this? Awfulize. That's a term popularized by Dale Carnegie, author of How to Win Friends and Influence People. To awfulize is to consciously think about the worst that can happen. Carnegie talks about facing up to the worst-case scenario, rationally understanding that it's unlikely to happen, and then moving on so that it doesn't stress you out.
Once you've done that, you take steps to prepare for the worst case... And that leads us to the next step...
- Have a stash of cash.
Let's imagine an extreme event...
Let's say that your government announces that it's limiting cash transfers to $1,000 a day per account, to ease selling pressure on the currency. That's how it starts. Things could get worse... Perhaps that figure is cut. Maybe selling local currency is completely banned. Crazier things have happened.
You can bet that the people who have anticipated a currency crisis before it happened were a whole lot happier than those who were left with a lot of worthless paper.
No matter what – unless things turn really ugly, like the example above – cash will get you what you need if your debit or credit cards (or Apple Pay) don't work.
But if your cash is in a bank that has gone bust, or if the ATMs stop working, money in the bank won't do you any good.
So keep enough cash in a home safe to get you by for a few weeks – or a few months, preferably. And given negative, or microscopically tiny, interest rates in much of the world, you might be better off earning zero interest under your own roof than negative interest somewhere else.
- Own some gold.
When the U.K. voted to leave the European Union and the British pound collapsed, the price of gold soared. In a time of crisis, it's the asset people flock to...
Gold has maintained value over time better than any other asset on earth. That makes it a no-brainer way to store some of your wealth. Just look at the Great Recession in 2008 and 2009. The value of more common stores of wealth – like stocks and real estate – plummeted. But during that time, the price of gold nearly doubled.
And, in the event of a currency crisis, you can negotiate with gold. It's not easy... A gold coin is worth a lot of money. Right now, a 1-ounce coin is worth more than $1,800. And it's not as if someone is going to give you change for a gold coin. But if nothing else is working, a gold coin would probably open a lot of doors.
In most times, a stack of $20 bills will be more useful than a gold coin or two... But if we're talking about abnormal times, a few gold coins sure can't hurt.
- Diversify where you bank.
Most of us think the banking world works something like this...
We put our money in a bank, where it will stay safe until we ask for our cash back. We assume that the people running the bank aren't taking crazy risks with our cash... that the financial regulators are keeping banks honest... and that the value of the currency won't plunge.
But that's not always how it works. Your cash is safe in a "too big to fail" bank... until it's allowed to fail. Or until you can't get your cash out of the bank.
One easy step to diversify where you bank is to also keep some money in a conservative local lender where they know you by name. Maybe it's a credit union, or a city bank that has been owned by the same family for generations, or a small regional lender that hasn't been gobbled up by a big national bank.
These types of institutions are less likely to have large holdings of high-risk derivatives that might blow up in the event of a crisis... taking your deposits down with them.
The Federal Deposit Insurance Corporation ("FDIC") insures bank deposits up to $250,000 per depositor, per bank. (The National Credit Union Administration Share Insurance Fund has the same limit for credit unions.) If you have $250,000 in excess to deposit, spread your cash around to different banks to stay below the insurance cap.
Importantly, though, just because a national banking insurance entity "guarantees" the safety of your money, that doesn't mean you'll get any money when you need it. And it won't help much if the currency of your deposits plummets in value.
So... even better, have an account in a different country. If you hold an American passport, this is increasingly difficult. But there are still ways you can open an account outside of the U.S.
- Download now what you might need tomorrow.
Don't assume that personal data and records that are online – starting with bank or brokerage statements, for example – will be there when you most need them. Periodically download personal records and store them someplace safe – whether that's printouts or your hard drive (even better... have a backup in the cloud, and another on a portable hard drive).
The last thing you want to do when chaos hits is be stuck on perma-hold to speak with a faceless customer-service agent who wants to do nothing more than get you off the phone as soon as possible.
Be sure you have what you need in your hot hands. Don't rely on others for anything – most importantly, your financial life.
While these steps might seem overwhelming, you don't need to get them all done right now. Instead, take the time to evaluate where you are today and the gaps in your preparation for a crisis. Then reread these steps and see what you need to do next. But make sure you don't delay...
We never know when the next crisis might hit. And when it feels like a long way away – that's just the time to prepare.
Editor's note: In the most recent issue of Retirement Millionaire, Kim explained how a crisis can destroy your hard-earned wealth. And he detailed exactly how to protect your portfolio from disaster. If you're not already a subscriber, click here to get started with immediate access.
Simply holding stocks and bonds isn't enough to weather a crisis. If you want to prepare for whatever the future throws at you, you need to make sure your portfolio is truly diversified... Get the full story here: When Crisis Hits, You'd Better Be Holding This Asset.
We're in the last phase of the Melt Up. And that means the Melt Down is coming – potentially this year. But timing the bottom and buying after a crash isn't easy. So make sure you know the qualities of a great buy-and-hold investment... Read more here: How to Find the Perfect Stock to Own for the Long Term.
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