Consumer Confidence and Home Prices Continue Slide

Consumer confidence and home prices continue their sharp declines as the stock market shrugs off the bad news today. Nothing really surprises me with the stock market these days. I guess the bulls continue to trust that Ben Bernanke will save the day. I fear the Fed will eventually run out of cards to play before doing more harm to our economy than good.

Consumer Confidence Index
The Conference Board's consumer confidence index fell to 64.5 points in March compared to 76.4 in February. This is the lowest reading in five years. The consumer expectations component of the index fell to 47.9, the lowest reading in 35 years.

S&P Case Schiller Home Price Index
According to the Standard & Poor’s / Case-Schiller home price index, the housing crisis is getting worse. Home prices in January dropped 10.7% from a year ago in 20 major U.S. cities measured. This marks 13 consecutive months of decline.

The data was ugly today. In my opinion, it is inevitable we are heading towards a recession. Perhaps your local economy is already in a recession.

How should this data impact your investment strategy? I’m not ready to call a bottom yet. While most personal finance bloggers preach a “buy and hold” strategy, I'm not convinced. I’m sticking with my large cash position and I continue to protect my capital. I abandoned the “buy and hold” strategy 7 years ago and I’ve outperformed the S&P 500 in 6 of those years.

Good or Bad: The Federal Reserve Rate Cuts Will Impact You

I’m not happy with Ben Bernanke and the Federal Reserve over the past six months. Since last September, the Fed Funds Rate has been cut from 5.25% to 2.25%. The Fed is cutting rates because “financial markets remain under considerable stress.” In other words, the Fed is bailing out greedy and careless financial institutions. Mr. Bernanke, what about those of us who take care of our finances? Why should we pay for the mistakes of these reckless banks and brokerage firms?

How does a rate cut affect you? That depends on your financial circumstances.

Savings Accounts – Bad news for savers. CDs and money market accounts will drop with the Fed Funds Rate. Since last September, my ING savings APY% has dropped from 4.50% to 3.00%.
Mortgages – Fixed rate mortgages aren’t impacted by short-term interest rates. The bond market sets the long-term loans. Yes, the 30 year fixed rate has fallen approximately 0.4% since the Fed started cutting rates. But don’t thank Ben Bernanke for that.
Home Equity Loans and Lines of Credit (HELOC) – Good news for everyone who has a HELOC. These rates are tied to the prime rate. Since the prime rate moves directly with the Fed Funds Rate, you should be seeing a drop in interest rates.
Credit Cards – A lower Fed Funds Rate is good for everyone who carries a credit card balance. Credit card interest rates are tied to the prime rate. Be sure to call your credit card lender and ask for a rate adjustment.
Automobile Loans – New automobile loans will also likely see lower rates.

Just in case you haven’t noticed. Savers are penalized and spenders are rewarded. So how does a rate cut affect you?

Is Your Local Economy in a Recession?

USA Today published a great article last week entitled How’s the economy in your hometown? The piece does an excellent job of explaining that economies are local. The article claims five states are already in a recession including Arizona, California, Florida, Nevada, and Michigan. Fifteen other states are “at risk” of slipping into a recession. The remaining thirty states are currently experiencing economic expansion.

My new hometown of Houston is holding up well. Unfortunately, my old hometown of Minneapolis is currently “at risk” of recession. Is your local economy in a recession? If so, my advice is to do your best to ride it out. Over the past five decades, the average recession lasted only 11 months. Yesterday, I explained how I prepared myself for a recession. If your local economy is at risk of a recession, the most important thing you can do is make yourself invaluable at work, get rid of debt, and improve your cash flow.

How to Prepare for a Recession

It is likely that the U.S economy is heading towards a recession in 2008. We may even be in a recession now. But what does this mean to you? Are you prepared for a recession? How do you survive in an economic downturn? In my opinion, if you aren’t prepared for the current recession, it may be too late. So start now and prepare yourself for the next recession. That’s exactly what I did.

The last recession in the U.S started in March 2001 and ended November 2001. I was not prepared. I nearly lost my job. I had a very small emergency fund. I had debt. I had a mortgage. I had a family to support. I was stressed and worried. As Harry S. Truman said, “It's a recession when your neighbor loses his job; it's a depression when you lose yours.” Fortunately I didn’t lose my job, but I vowed to never put my family in that position again. Below are the steps I took to prepare myself for the next recession.

I improved my job security. During the last recession, my company had several rounds of layoffs. To make the situation worse, the small community I lived and worked in had very few other professional opportunities. Rather than leave my company, I found an opportunity in a different department and relocated to a major metropolitan area. This allowed me to stay with my company and protect myself from future downturns. I still work for the same company and I’m very happy with the moves I have made.
I paid off debt. The only debt I had in the last recession was two car notes and a mortgage. But I also realized I would default on these loans quickly if my income suffered. I no longer have debt other than a mortgage.
I downsized. I downsized from two vehicles to one. Surprisingly, sharing vehicles with my wife is only a small inconvenience. My home is also much more affordable after relocating a second time.
I cut spending. I haven’t gone overboard but I’ve always been frugal. I’ve rejected temptations to spend on large ticket items. I've also avoided the "Keeping up with the Joneses" mentality.
I built an emergency fund. My emergency fund during the last recession would have went dry after only one month of unemployment. Due to my downsizing and spending reduction efforts, my emergency fund is now comfortably more than one year of living expenses. This might be a little extreme, but it feels comfortable and I’m currently earning approximately 5% on this money.

I recommend my readers take the necessary steps to prepare for the next recession. Start today and don’t panic. Put an action plan in place and work diligently to make it happen. Be consistent and practice patience. My plans took several years to come to fruition and it’s always a work in progress.

I’d like to hear what others are doing to prepare for the next recession. Please feel free to comment.