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Four quick sanity checks to stop the credit crisis killing your finances

We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people [1] who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.

The bankers did it, everyone got cold feet, and now we all have to live with the consequences.

However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…

Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed [2].

1. Get out of debt

Because of the credit crunch, money is becoming more expensive.

I’ve written before about why you must get out of debt [3]. But with the credit crunch being described as a great ‘deleveraging’ [4] (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.

What it means for us

Action plan

Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt [5]. (But please comeback soon!)

2. Check your savings rate

Because of the credit crunch, banks need cash.

The main effect of the credit crisis so far has been felt by those who caused it – the banks. (The subprime mortgage defaults are a scandal, but they were not specifically caused by the credit crunch. Rather, they kicked it all off.)

Banks are very reluctant to lend to each other as normal, and when they do so they’re charging much more than in usual times.

They’re also massively unhappy to hold wacky financial products on their balance sheets, since the only certain thing about the values of these assets is that they’ve been plunging. (Every time you read about a big bank writing down a few billion dollars [6] because of the credit crunch, that’s someone looking at a balance sheet, going “Uh oh”, then taking out a calculator and redoing the maths).

What it means for us

Action plan

3. Work out if you need to spread your savings

Because of the credit crunch, banks are going bust.

In the UK, Northern Rock was nationalised [7] (eventually) by the Government, after a run caused when savers got wind of the difficulties it was having raising money and tried to withdraw their money at once. The recent collapse of Bear Stearns in the US is similar, except the spooked investors were hedge funds and other financial institutions.

What it means for us:

Action plan

4. Know your mortgage: the size of the loan, the rate you pay, and when your current deal ends

Because of the credit crunch, banks are becoming less generous with their mortgages.

For anyone except perfect borrowers, choice in the mortgage market is drying up in both the US and the UK. Crazy 125% mortgages are long gone – and good riddance – and so are 100% or ‘no money down’ mortgages. Will 90% mortgages be next?

Building societies have been voluntarily (and temporarily) closing their loan books to avoid being overwhelmed by desperate homeowners. Will we go back to the old days of rationed mortgages that banks balance against their deposits? It’s unlikely, but possible.

What it means for us:

Action plan

Tomorrow I’ll turn to investing, protecting your income, and other longer-term actions to take if you’re to not just survive but ideally thrive in these tougher times. Subscribe via RSS [2] or my email newsletter [11] to make sure you don’t miss out!