How to prepare for the next financial crisis before it hits.
What would you do if you found out a cyclone was coming?
Would you sell your house and move south?
Or, would you batten down the hatches and protect your home from the effects of the storm?
Well, according to Nathan Birch, a storm of a different kind is coming – a global financial depression.
And, while he doesn’t think we should sell all our assets and start our own civilisation based on cryptocurrency, he does think it wise to get informed and take action to protect our finances.
Wake up and smell the coffee.
When things are going good it can be hard to accept that they will ever turn sour. But, since the economy operates in both short and long term debt cycles, recessions and even depressions are inevitable.
“A lot of people are blindsided,” says Nathan. They think that things have been good and will stay that way for a long, long time, he says.
“But, things have been bad in the past,” he says, which is why it is important to join the dots and prepare for scenarios that might happen – before it’s too late.
Cyclones don’t happen all the time, he says. But, if there has been torrential rain and strong winds and it seems likely that a cyclone is coming, removing trees from around your house can prevent against damage before the cyclone hits.
It’s the same with the economy. If there are signs emerging that a global depression is likely, then knowing what to look out for and how to protect your finances is key to preventing major damage.
Make sure you stay informed.
Nathan says it is important to educate yourself, not only about the property market, but also, about the global economy at large.
Understanding how the monetary system is driven by the supply of liquidity will help you navigate the major changes of each market cycle.
It will help you identify when prices are likely to start dropping and recovering – knowledge that you can apply to your own strategy and position.
Read between the lines.
But following the news is not enough, says Nathan.
There is a vested interest for the media to look after their advertisers, which means you never really get the full story on what is happening in the market.
He recommends analysing data rather than listening to opinions.
Data can be pulled from different sources, such as from the central banks around the world.
By analysing the world markets and everything happening in between, says Nathan, it is possible to draw a picture of how things work in order to see what would happen if different markets crashed.
Know where you’re at.
Before you can protect your finances, you need to know what position you are in – which is a surprisingly hard task for some.
“Strangely enough, a lot of people don’t even know their own position,” says Nathan.
“They don’t look at it and review it and analyse it enough.”
“Being proactive with your position and seeking advice, seeking knowledge, seeking education is really important,” he says.
The next step is to make sure everything is in order – that all your ducks are lined up and you are ready to face the storm.
Should you stay or sell?
Nathan says if you need to sell a property, make sure you do so before the GFD hits. This will prevent you from being stuck in a position where you are forced to sell in unfavourable circumstances.
If you are not sure whether you should sell or hold onto a property, it is important to look at the entry and exit costs and assess your situation. If you have purchased something that didn’t perform in the way you were expecting, it may be better to cut your losses and sell. Or, it may be better to hold onto it through another market cycle and adjust your plans/strategy.
Another thing to consider is whether you would be able to rebuild the same position if you were to sell all your properties and start again. According to Nathan, the changing lending environment wouldn’t make this an easy task to achieve.
“Speaking with a professional is really important in order to work out what’s next,” Nathan says.
Assess your cashflow.
“Make sure that you’ve got your cashflow in order,” says Nathan.
“Look at things that you can cut from your expenses and look at things you can do to improve your income.”
Improving your cashflow will help your bottom line as well as improve your position in the eyes of lenders.
Free up your capital.
Nathan also suggests speaking with a finance strategist in order to see what you can do with your portfolio.
It may be a good idea to access equity now while you can.
“I’d rather pull out equity and park it to the side before a crisis hits,” he says.
Why? Because it is easier to get access to the money now than it would be during a GFD. It is also more likely that you would get a better valuation.
“Put the buffer in place so that if your property goes down in value the banks are in trouble more so than you,” says Nathan.
Seek financial advice.
To really make sure you are in a good position to weather the storm, Nathan suggests speaking with a financial advisor who really knows their stuff.
There are a lot of advisors who have only been in the industry during the good times and who may give ill-toward advice.
“Make sure that you’ve got a financial advisor that’s been through markets and through cycles who understands your strategies, your goals and can help you get through to safety.”
Once you have taken action to prepare yourself for the GFD, you can rest assured that you have done everything possible to protect your finances before it is too late.
Then, when the storm is over, you can enter the next phase with confidence that you have a steady financial foundation underfoot.