Down economies require better money management

Unless you have one or more seven-figure trust funds, wise money management is always appropriate. In periods of down economies and recession, smart money management is a necessity. The current global economic stagnation affects all banks, business entities, and individuals to a degree not endured since the Great Depression of 1929.

With lower salaries, layoffs, downsizing, and employer income reductions, your efforts to manage your available funds is critical to your prosperity – possibly, even survival – during this period.

The banking industry is making numerous changes – most of them designed to protect the institutions – that will directly or indirectly affect you and your money. Much like you, banks and credit unions must protect their available cash and investments, while generating as much revenue as possible.

Their efforts will often affect you – for better or worse – mandating that you know what changes they are making and that you respond to their actions with wise moves of your own.

Just as the business world must understand that you will probably restrict your spending, new loans, luxury purchases, and home improvement activities, while expanding your cash conservation efforts, you should understand and respect bank and credit union action plans to achieve the same goal.

The following are some wise banking moves you should consider to respond to financial institution changes and to combat the negatives offered by the down economy.

Smart banking moves to consider

Evaluate your bank's stability

While commercial banks are typically more negatively affected than mutual savings banks and credit unions, no banking institution is automatically immune to serious problems spawned by a down economy. Ensure that your bank is still financially "safe and sound".

Use the Internet and other sources to convince yourself that your favorite financial institution still warrants your loyalty. Make sure they are part of the newly increased savings account insurance protection (up to $250,000 per account) provided by FDIC (banks) and NCUA (credit unions).

Check out the competition

Examine the competition for better interest rates on a savings account, money market account, and certificate of deposit. You might believe that the down economy is automatically driving deposit account interest rates downward. This may or may not be true.

There should be some banks and credit unions, in an attempt to display concern for their customers/members, that will actually offer a bit of a premium on their deposit accounts. As usual, the Federal Reserve and competition will eventually determine the longer-term rate level, but you might find some pleasant surprises with the offers from certain banks.

Consider less "flexible" products

Consider less "flexible" products, like money market accounts or certificates of deposit. If you've decided to restrict your spending for the near future during this economic downturn, you might be able to enjoy the higher interest rates offered on a money market account or certificate of deposit to maximize your dollars' earning power.

By keeping the minimum in your transaction (checking) accounts and diverting funds to a higher paying savings account may also help you keep your spending control goals while earning more money.

Don't cash out

Resist the temptation to withdraw large amounts of cash and hide it under your mattress or in your freezer wrapped in Genoa salami. First, when using the cash, merchants may make odd looking faces from the smell. More importantly, as every banker knows, cash is a very "expensive" asset.

Moving your funds from an interest bearing savings account to your freezer and wrapped in deli meat costs you earnings. Since your deposit accounts are insured by federal government entities, even if your bank suffers a terminal disease, your balances are protected up to the insurance limits.

Get creative

If you have enough cash, consider "laddering" some certificates of deposit. Laddering CDs provides some cash flow and interest rate protection for you. Here is how to do it. Divide your available funds into two to four "pieces". Visit your favorite bank or credit union and purchase as many CDs as you have "pieces".

Just make sure that they have different maturities. You might buy one that matures in six months, another that matures in one year, a third maturing in eighteen months, etc. This helps ensure at least two important considerations. You'll regularly have a CD coming due to offer you the cash you might need.

Second, you'll avoid having your savings go "under water" – having a fixed rate CD earning less than the current prevailing savings interest rate.

Formulate your own action plan

Many people read headlines that document the chaos that economic downturns create in the business community, yet do little to create their own action plans to safeguard their own cash and savings.

Who or what is more important than you? Consider one or more of these wise banking moves in 2009 and the near future to protect your cash and earn as much as you can from your favorite bank or credit union.

See also: Banking tips