Living Well If it feels like the mist of crisis is lifting... That's the best time to prepare for the next pea-soup fog.
Right now, the United States is opening up again, as huge numbers of Americans get the COVID-19 vaccine... 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 – for uncertainty, volatility, asset price collapses, and, of course, pandemics. You want to have an umbrella before it starts to rain – rather than wind up drenched or pay top dollar to an enterprising sidewalk umbrella vendor.
You want to lay the groundwork to thrive, rather than just survive the next crisis, when there's no crisis on the horizon.
To paraphrase the opening line of Leo Tolstoy's Anna Karenina, every crisis is terrible in its own way. Whether it's financial, political, or medical, no crisis is the same. So that means that your preparation and response need to be flexible.
Today, I (Kim Iskyan) am sharing five steps you can take now to prepare yourself for the next crisis...
1. 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 things will operate in the future, pretty much the way they have in the past. The danger of normalcy bias is that we don't think much about what could be different, its impact on our lives, or how to prepare for that possibility.
You can't anticipate everything that could go wrong. But just the experience of thinking about what could go wrong 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, of How to Win Friends and Influence People. To awfulize is to consciously and intentionally ponder the worst that can happen. Carnegie talks about facing up to the worst-case scenario, rationally understanding that it's very 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...
2. Have a stash of cash.
Let's imagine an extreme event...
Let's say that your country's government announces that it's limiting cash transfers to $1,000 a day per account, to try 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 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's 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 with someone else.
The U.S. dollar is the default global currency. Almost anywhere in the developing world (and in much of the rest of it), a U.S. $20 bill can fix a lot of problems quickly (and $100 bill can fix the rest).
The best explanation of this is from a classic article in Esquire magazine, called "The $20 Theory of the Universe "...
... a twenty-dollar bill, now, that's a thing of beauty. Nothing static about a twenty. Used correctly, a twenty is all about movement, access, cachet. Forget the other bills. The single won't get you much more than a stiff nod and, these days, the fin is de rigueur. A tenner is a nice thought, but it's also a message that you're a Walmart shopper, too cheap for the real deal. A twenty, placed in the right hand at the right moment, makes things happen. It gets you past the rope, beyond the door, into the secret files. The twenty hastens and chastens, beckons and tugs. The twenty, you see, is a verb. It's all about action.
Keep cash. Including lots of $20 bills.
3. Have 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...
One of the main reasons why gold is a must-own commodity is because it has maintained value over time better than any other asset on Earth. That makes gold 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.
4. 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 in which we hold our assets 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 and operated 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... and take down your deposits with it.
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.
But 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 – U.S. compliance requirements imposed on financial institutions around the world have meant that it's time consuming and expensive for banks outside the U.S. to take on American customers. But there are still ways you can open an account outside of the U.S. Read my piece on international banking options here for more.
5. 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 when your financial life is hanging in the balance.
Instead, 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, as I mentioned before, 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. So start today.
Best regards,
Kim Iskyan
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.