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Apple held its new products show on September 9. It kind of fell flat
. For example, a $99 “Apple Pencil” immediately came in for ridicule because, first, it was $99, and second, Apple founder Steve Jobs once said
“As soon as you have a stylus, you’re dead.”
Even before the product announcement, Apple stock was falling – the first time since 2007 it had done so right before a new product launch. Apple had been largely immune to stock market drops. Not anymore. Shares have fallen 17 percent since July
The stock market drop of the last few months has not caused major concern, with most analysts calling it a correction
. But the market is still volatile.
Stock market collapses begat recession before, most famously the crash of 1929 that started the Great Depression. It seems all of the major recessions of the last century had two commonalities: debt and lack of short-term savings.
For example, in 1929, people bought stock by paying 10 percent of the stock price up front and borrowing the rest, using the stock itself as collateral
. When the market collapsed, investors didn’t have enough money to cover the cost of their loans. People became leery about buying on credit, production slowed to accommodate fewer purchases and companies laid off workers.
Suze Orman, a popular financial planner, said getting rid of debt is one way to prepare
for a personal financial crisis.
“If you still have income coming in,” she wrote, “make it a priority to pay off credit card debt ASAP. If you have an outstanding 401(k) loan, pay it off now.”
To make money for saving and paying off debt, look for ways to reduce spending.
“Repeat after me: Needs, yes. Wants, no. Got it?” Orman wrote.
In 1930, a series of bank collapses deepened the Great Depression, according to a history of the Federal Reserve
. All banks lend some cash deposited into them and keep some as savings, called a cash reserve. In 1930, while a check was being processed, that money was counted as cash reserve in two banks: the one from which it was withdrawn and the one it was going to. This meant banks had less cash in reserve than they said they did.
Many banks also kept most of their cash reserve in other banks belonging to the same company. If one bank needed cash because its customers were withdrawing too much, it had to turn to its correspondent bank, whose customers might be doing the same thing. Too-small cash reserves caused the collapse of hundreds of banks in 1930 and 1931, according to the Federal Reserve history. The country arguably didn’t recover from the Great Depression until World War II. The stock market didn’t again reach pre-1929 highs until November 1954
Ann House, coordinator of the Personal Money Management Center at the University of Utah, said her father-in-law lived through the Great Depression. After his death, his family found $150,000 while cleaning out his home. She does not recommend that approach to saving, since banks are now insured.
She also does not recommend the other approach Americans are taking: not saving.
One study published in April said a third of households making $75,000 per year or more are living paycheck to paycheck
“There’s not going to be a run on banks in the U.S., because Americans don’t have savings,” House joked.
Many financial advisers recommend saving at least 20 percent of earnings. Part should go into retirement, part into short-term savings and part into an emergency fund, House said.
The short-term savings fund is for future expenses like holidays or a down payment. An emergency fund helps when things come up like car repairs or doctor bills, so you don’t have to use high-interest debt like credit cards or short-term loans.
Take savings out first via direct deposit. Then live off the rest. It’s an out of sight, out of mind thing, House said.
“I know if I keep extra money in my checking account, I will spend it until it’s gone,” she said.
Keep up to $1,000 in small bills in a short-term emergency kit, House suggested. ATMs might not work in emergencies.
“If you were out of water, and somebody came by with a water-selling wagon, you might be giving the person a $100 bill for water. It’s $1 bills that are going to come in handy for emergencies,” she said.
Personal finance collapses like job loss, divorce, medical emergencies and retirement are far more common than a major financial market collapse. Getting out of debt and saving can reduce their impact.
“It’s unlikely we’re going to have a big crisis like [the Great Depression] again if we heed what’s going on and do some tweaking,” House said.
What are you doing to prepare for a market collapse or other financial crisis? Let us know in the comments!