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In March, Federal Reserve Chair Jerome Powell expressed concern that in the wake of banking sector turmoil, households and small businesses could experience a credit crunch. An April survey from the New York Fed suggests that this crunch has already begun.
Whether it’s already happening or looming on the horizon, Straight Arrow News contributor Larry Lindsey has some advice for borrowers navigating the challenges of tighter lending standards.
What should you do? Well, it comes back to basic prudence, the kind of stuff you knew you’re supposed to do all along, but not many people do.
First, it’s always a good idea to have cash in the bank, money market funds, or a savings account or a checking account that you can spend easily, equal to two to three months of your spending. Now that’s a lot, most people aren’t there, but that’s a classic precautionary move in case there are periods like this.
Second, you should be sure to pay down your high interest credit cards if you possibly can. Well, that assumes, of course, that you have extra money, and a lot of people are living paycheck to paycheck. We all feel like we’re living paycheck to paycheck but if you really take a close look at your spending, I’m sure there are some things you can cut out. You should entertain at home and cook at home rather than go to a restaurant. It’s about as third as costly to cook at home as to go out. You might want to think about that vacation, maybe spend it closer to home, have a lot of family time, go to some local parks, what have you, instead of traveling somewhere. Or you might look around for a second job or maybe even a higher paying new job. Don’t rush into a completely new job though. Your current job likely pays your health benefits and those are very valuable.
Also, keep in mind that this crunch, if it develops, is likely to be temporary. People in this country, we’ve lived well, we’ve actually lived beyond our means — that’s why we’re having to borrow from foreigners — and now we got to pay the piper. It’s as simple as that.
This will not be the first credit crunch in your life and it will not be the last. Time now to get prepared for that next one, go back to basic prudent household management, get some money in the bank, pay down your high interest credit cards and learn to live within your means.
