Greg McBride offers his financial tips

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Americans haven’t heard a lot of good news this past year.

The country has hemorrhaged a total of 1.2 million jobs since January, according to the October employment report from the Bureau of Labor Statistics. Credit tightened, banks failed, bailouts ensued and stock market swings shrunk many people’s retirement savings.

To make sense of the meltdown and shed light on what consumers can expect in 2009, we turned to Greg McBride, CFA, who is a senior financial analyst at He shared his insights into the forces that led to the current crisis and offered tips for toughing out these rough economic times.

How did the subprime mortgage crisis lead to the credit crunch, the financial bailouts and the snowballing problems we’re seeing across the country?

It started as a repricing of risk coupled with excessive debt, whether it was mortgages to borrowers who didn’t document their incomes, or lending to unstable governments or weak companies. Risk is now better reflected in loan terms after having been largely ignored for several years. What happened when risk got repriced, all of a sudden: A lot of loans that had been made were no longer being made, such as subprime mortgages. Much like kids jumping off the furniture, it’s all fun and games until somebody gets hurt. Then nobody jumps off the furniture. And now nobody wants to lend to risky credit. There have been instances where banks won’t even lend to each other, and that puts the whole system at risk.

What effect has the unraveling financial crisis had on business and consumer spending?

Everyone — businesses and consumers — are in hunker-down mode now. With so much uncertainty regarding the economy, people are reluctant to spend.

What is the outlook going forward?

2009 probably isn’t going to be a lot of fun for anybody. We’re still going to be in recession and probably a deep recession. But there will be some opportunities. Falling home prices coupled with low mortgage rates will continue to attract bargain hunters into the housing market. Home prices will probably continue to decline. They’re certainly not going to jump higher, so affordability will only get better.

What lessons can we learn from the subprime crisis?

The first one is the same lesson that we learned with the tech stock bust — fundamentals matter. The other lesson we’re learning is that consumers cannot borrow their way to prosperity.

Companies all over the U.S. are hurting right now and many people are experiencing or fearing layoffs. Looking ahead, will employment levels get any rosier?

Unfortunately, employment is a lagging indicator. We’ll begin to see a turnaround in the stock market and the economy well before we see a return to substantive job growth.

How should people prepare financially for a coming layoff?

Build a savings cushion. Knock out any credit cards or other debts with low balances, cut your spending and identify other areas you can cut later if your job is eliminated.

If you get laid off, what are some of the immediate steps you should take?

That’s where you really have to take a long hard look at your expenses. At that point you’re not in a position to build a savings cushion. The biggest step you can take is cutting expenses and if it takes a drastic cut just for a couple of months, it can make a huge difference until you can get back on your feet and back to work.

For emergency funds, the recommendation is to save three to six months’ worth of living expenses in a money market or savings account. Given that an increasing number of people are going without work for more than six months, how much money should people, ideally, be socking away?

As of October, there are 2.3 million people that have been out of work six months or longer. The short answer is that more savings is better than less. But keep in mind the unemployment rate might go to 8 percent or 9 percent but even then, 91 percent or 92 percent of the people are still working. So, don’t completely eliminate your 401(k) contributions and other savings goals unless you feel there’s a real risk of your job being cut. Scaling back retirement contributions to build a savings cushion is one thing. But stopping completely is something that really should only be done if you’re facing an imminent risk of job loss.

Credit card issuers are tightening lending standards and reducing their risk. How should consumers deal with reduced credit limits and tougher approval standards?

This advice never changes. Pay down your debt and don’t add to it. But also, keep a close eye on your credit limits because paying your bills on time isn’t enough to avoid a reduction in your credit line. Making minimum payments and having an escalating balance are red flags to credit card issuers.

Is it a good idea in this environment to open up new cards and do balance transfers in order to reduce your debt?

Here’s the thing. A balance transfer is great, but it’s only the first step in a two-step process. The second and most important step is to then use that lower-rate card to accelerate your debt repayment. Opening new cards and transferring balances will do more harm than good without that all-important follow-though of aggressive debt repayment.

Lastly, what should people do if their bank fails or merges with another financial institution? How do you protect your accounts?

In most cases, a bank failure is more like a bank merger. As long as your money is FDIC-insured, you have no need to worry. Be advised that having a home equity line of credit could see that line frozen in the event the bank fails. Just make sure your deposits are fully covered by deposit insurance. At that point, the bank failure is the bank’s problem, not your problem.