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weathering the current financial storms

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I think we can safely say that there is a minor financial crisis going on, as a big American investment bank went under yesterday. This is compounding in the UK the natural cycle of the housing market, which was overdue another collapse and is now definitely heading down.

But, what does this mean for the people like us?

Well, I think if you’re being sensible financially, then it will probably turn out ok.

If you work in the finance or property industries then you might want to polish up your cv. On the other hand, it won’t hurt anyone to polish up their cvs as long as they don’t do it on works time. I’m keeping an eye on what’s going on in my industry, which I think should be pretty much ok for the time being, you might want to do the same.

If, like me, you bought at what I’m now certain was the top of the property boom then the chances are that you are stuck with the house for a while. I hope you like it. My tactic is to maintain sensible-ness. The house I bought needed cosmetic work which I’m slowly doing as I can afford to. I’m not paying extra on the mortgage at the moment as I can get a better rate on my cash ISA, but if and when that changes, I’ll consider paying down the mortgage further to try and stave off the risks of negative equity.

If you need to sell your house, then be prepared not to get the amount that it was with a year or two ago. Take the best offer you can actually get, not the one that you think you should get. It’s eminently possible that you won’t get enough to cover the mortgage, particularly if you bought recently. If that’s the case, you have my deepest sympathy, but I’m afraid that the mortgage you took out bears no relation to what the house is actually worth now.

If you haven’t bought, but you would like to in the next couple of years, the biggest problem you have currently is that it has become much harder to qualify for a mortgage. This will affect you the most if you are self-employed, and you may well need to produce tax returns and accounts. But, everyone thinking about buying soon should be saving as large a deposit as possible (reduce your loan-to-value number) and maintaining an impeccable credit score. Once you’ve got a mortgage arranged, hold out for a good deal, buyers are like hen’s teeth at the moment.

In a similar vein, it’s much harder to get a loan than it used to be. Fortunately you’re all sensible people, and you don’t need a loan, except maybe a student loan (which is not subject to commercial rules) or a loan for a car if you must. Anyway, keep on top of your credit record and credit score, make sure your cards are paid off and that you generally look in excellent financial shape.

Most of us should be savers and investors. You are saving and investing, right? Well, the stock market isn’t doing so well at the moment, but that’s ok because we are not day traders, we are in it for the long haul. I’ve set up my regular investing plan and I’m sticking to it. I suggest you do the same - if you want help understanding stocks and shares ISAs, you could check out my basic guide to stocks and shares ISAs. If there’s any requests, I’ll try and do something similar for pensions at some point.

As for your savings, if you have any spare cash in your budget you might want to add it in to your savings account, which should really be on auto-magical. The only important thing to remember is the insured limit. If a bank goes under, then all your money below the insured limit is protected and safe, otherwise you have to take your chances. Currently, in the UK the insured limit is £35k per bank.

Finally, review your insurance provisions. Do you need unemployment insurance? Have you got enough household contents cover? What would happen if your car was stolen, or you were burgled? Do you need to bump up your emergency fund to cover the excess/deductible?

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17 comments for “weathering the current financial storms”

  1. Thanks for another great post. I just thought I’d mention that some expect the government to increase the insured limit to £50,000 today.

    Posted by Keiron Nicholson | September 17, 2008, 6:52 am
  2. It’s not really just people working directly in the financial or property industries that should keep their eyes and ears open. There is such a huge knock-on effect throughout seemingly unrelated industries that everyone would benefit from stopping snoozing through those financial reporting meetings at work, so that you can keep an eye on what’s happening in your particular industry.

    Posted by FruGal | September 17, 2008, 1:21 pm
  3. Definitely everyone needs an awareness of what’s going on at work. Keep an eye out for stuff that affects your company, and stuff that affects the wider industry that you’re in.

    Posted by plonkee | September 17, 2008, 1:57 pm
  4. Here is a question…

    What if you had a brokerage account with say Halifax with whom you bought shares with.

    If they went under what happens to your shares, surely they are just holding them for you and are not included in their assets?


    Posted by DavidD | September 17, 2008, 2:28 pm
  5. @DavidD:
    It’s not very clear. The FSCS also covers investments taken out after 28/8/1988 with compensation up to 100% of the first £30k and 90% of the next £20k. Some of the information on the site suggests that’s aimed more at mis-selling, but I think you might be covered.

    Posted by plonkee | September 17, 2008, 4:22 pm
  6. @DavidD:
    I’ve checked with the Halifax T&C and it definitely states that its covered by the FSCS for sharedealing, so you can get up to £48k in compensation if it all goes horribly wrong.

    Like your savings account, when a bank goes into administration without something like the FSCS, you become just another creditor. No major banks have defaulted in the UK, but in the US creditors get back between 40% and 100% of their money, averaging around 72%.

    Posted by plonkee | September 17, 2008, 4:34 pm
  7. But surely if I bought shares in BT with Halifax as the broker. If Halifax were to go bust they could not sell my shares and use this money for their liabilities, I am still the owner of those shares arent I?

    Thanks for the info.


    Posted by DavidD | September 17, 2008, 4:41 pm
  8. The problem is that you can’t access the money, that Halifax owes you (in the form of shares). If Halifax goes bust, they stop allowing people to withdraw cash, or in this case, sell shares.

    As far as I can tell, this means that you’re only guaranteed the £48k as the nominee account is the owner of the shares and you have the beneficiary interest. I seem to have reached the end of my knowledge and information that’s freely available :) .

    Posted by plonkee | September 17, 2008, 4:57 pm
  9. Interesting that the above questions are being asked outside of the U.S.

    The fallout from this will be interesting and disheartening at the same time.

    Posted by Chad @ Sentient Money | September 18, 2008, 4:19 pm
  10. @Chad:
    Finance is a global thing, and the British economy is heavily dependant on the financial services industry.

    Posted by plonkee | September 18, 2008, 4:26 pm
  11. This is really a global problem because so much money is affected when the investment banks are affected.

    I will be interested to see what happens in the next few weeks especially with people trying to get their money back from these investment banks, if they can…

    Posted by Jane | September 18, 2008, 6:18 pm
  12. i agree, with the present condition of the economy, selling your house means you’ll get a lot less than what you’ll get a couple of years back… not only that, it is pretty tough to even get a sale nowadays…

    Posted by Hector | September 22, 2008, 4:41 pm
  13. I try to keep an eye and ear open to what’s going on, but really I just try to keep my head down. All of my savings and investments are staying right where they are. Hopefully this will all work itself out soon …

    Posted by Maggie | September 22, 2008, 6:47 pm
  14. I worry about the other people, the people who may have lost their jobs in this crisis. I work with ShoreBank, luckily we’re doing ok. I think it’s ShoreBank’s green and socially conscious lending that protects us. Here’s more about ShoreBank: http://shorebankdirect.sbk.com/

    Posted by Julie | September 22, 2008, 8:35 pm

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