It's only Hump Day and so much has happened in the financial world in less than a week. Can you imagine if Angelina Jolie and Jennifer Aniston announced they've been having an affair behind Brad Pitt's back? Well, all this economic news is even bigger than that would be. Because while that buzz would last for some time, of course, it's yet to be seen how far reaching the effects of all the recent turmoil will be and how long it will continue.
It's really amazing how much can change in just the course of a few days. The Federal Reserve made not one, but two cuts to the interest rate that applies to banks when they borrow money overnight, and it had to bail out 80-year-old financial institution Bear Stearns when its investors essentially made a run on the bank. Bear was reporting $17 billion on its balance sheets just last week but its buyout bail comes out to about $240 million [1]. There's worry that other big financial institutions will face the same desperation in the near future. Find out what all of this news means for you when you
- Although interest rates are dropping, tighter credit terms [2] mean that you may not be able to capitalize on lower rates because it's harder to get approval for a loan. On top of that, home prices are continuing to fall and you might not have any home equity left to borrow against.
- Make sure that you have some cash reserves in case times get tough — that means consider increasing your emergency fund [3] to six months of living expenses instead of three.
- Don't panic, but make sure that your investments are allocated in accordance with your risk tolerance and time horizon.
- If you're invested in Bear Stearns' proprietary mutual funds (possibly in your 401(k)) you lost money when the shares value plummeted to $2 [4]. Also, your shares will be of JP Morgan Chase stock because they bought Bear Stearns.
- The Fed's main concern right now is fixing the financial sector at large, so take control of your personal finances by paying off your credit card debt and getting your financial act together.
Source [5]