Paradigm Shifted

The Fed lopped 0.75 off the fed funds rate this week, hoping to stimulate the economy. What does this mean for the average person? In general, it means there a few steps you should take to secure your finances in anticipation of a recession.

1. Lower your credit card APR. A drop in the fed funds rate is a drop in the prime rate, to which your APR is tied. If you have a good relationship with your creditors (ie, on time payments, longstanding account), now is the time to call and request they lower your rate, particularly if you carry a balance.
2. Pay off your credit card debt. That drop in the prime rate means a drop in the rate of your savings account. Consider putting a bit more towards paying off your debts at this time, but not so much to put your savings at risk. You still need a cushion, particularly if the job market tightens.
3. Refinance your mortgage. Mortgage rates will drop as well, so if you’re trapped in a variable rate, now could be a good time to negotiate a lower fixed rate. This is, of course, contingent on your having a decent credit rating. In addition, this could be a good time to buy a house as well, or apply for a HELOC.
4. Consider investing. Like weight loss programs, investments should be considered carefully, and with the assistance of an expert. A financial advisor can guide you in this area (Kiplingers is offering free advice this Friday). In general, though, as the stock market takes a downturn, index funds look appealing, particularly if you’re looking at 30 years or so of growth.
5. Buy a new car (soon). Consumer spending is down, and the rate just got cut. As new cars glut the market, dealers will be eager to sell 2007 models by mid-late 2008. You could negotiate a good 0% deal.
6. Go back to school. It doesn’t have to be a formal degree program, but if the job market tightens as well, this could be a good time to brush up on some skills, or learn some new ones.
7. Travel. Europe is out of the question as the dollar stays weak against the Euro. But several Latin American countries are tied to the dollar. In addition, the dollar still holds strong against several Asian currencies. Note: this applies only to those who are debt-free and in no need of major expenditures in the next couple of years.
8. Sit tight. If you have no need to do anything (buy a house, car, etc), then don’t do it just because the rate will be lower. Protect your assets first.