Every time you turn on the tv or the radio, all you hear about is the economic crisis — or the election, which has become about the economic crisis. But what if you don’t know what makes a mortgage “subprime”? What if you don’t know the difference between a money market, a mutual fund, and a money market mutual fund? And what the hell is “commercial paper?”
For an education about the swirling mess around you in plain English, look no further than NPR. Start by downloading the episode of This American Life entitled, “The Giant Pool of Money,” reported by Alex Blumberg. It explains just how this whole mortgage crisis started. I had to pay attention to what I was listening to — you can’t just have it on in the background — but after I heard the episode, a lot of things clicked into place. Apparently they clicked for a lot of people, because shortly after airing that episode, NPR began a new regular podcast called “Planet Money,” which explains each new disaster with the market as it occurs on a daily basis, often through answering listeners’ questions. This American Life also aired a second show about the economy, called, not surprisingly, “Another Frightening Show About the Economy.”
But what does that mean you should do with your money? Generally speaking, don’t panic. The economy operates cyclically, and sound personal finance principles apply no matter where we are in the cycle. Two books I have found very helpful on this topic are Suze Orman’s The Money Book for the Young, Fabulous and Broke (yes, her delivery is mildly annoying, but the info is solid), and The Complete Idiot’s Guide to Personal Finance in your 20s and 30s (or your 40s and 50s), Third Edition by Sarah Young Fisher and Susan Shelly.
And what about buying a home? Is now the perfect time to take advantge of lower home prices? Is it even possible to get a mortgage anymore? And how do you avoid becoming one of the millions in danger of foreclosure? Take a class. Many city agencies around the country hold free first-time homebuyer workshops. Some of them have been doing it for decades, but lately the demand has skyrocketed, so now there are even more places to find courses. Here in San Francisco, there are five different agencies that offer homebuying workshops. All of them are listed here, through the Mayor’s Office of Housing. I took my class at the Consumer Credit Counseling Service of San Francisco (CCCSSF). It was just three hours of one Saturday morning, but afterwards I felt much better prepared to tackle the prospect of buying a home, whenever that happens to be.
Two small pieces of advice regarding homebuying workshops: firstly, go now, not after you’ve already started the emotional and tempting process of visiting open houses. Secondly, do all of the numbers yourself. Our instructor stressed multiple times that buying a home was the best investment we could make, since it meant we would be “breaking the rent cycle.” But that’s not the whole picture, especially if you live in an expensive city or are not planning on staying in your first home for the entire 30-year length of your mortgage. This article presents some compelling reasons for a New Yorker to keep on renting. We figured out that for the first 5-10 years of our potential mortgage, we would be paying as much money in bank interest as we are currently paying in rent. The little bit that would go towards the principle, and therefore eventually come back to us, would just be tied up in the house, instead of earning interest in some sort of savings account.
Speaking of savings accounts, now is a fantastic time to start one. Because banks are competing so desperately for deposits, they are offering higher and higher interest rates on savings accounts. I recently opened up a personal CD at WaMu that earns 4.93%, and a Money Market account for my business that earns 3.99%. With a trillion dollars in assets behind it, JP Morgan is unlikely to tank with my savings, but even if it does, it’s all insured by the Federal Government. It’s a virtual no-risk situation, even in these risky times (unless the government itself goes bankrupt). So if you happen to have some extra money sitting around in your checking account, don’t stick it under your mattress, put it to work for you. In this economy, who couldn’t use a little extra cash?