Every week Clare Francis, financial journalist and editor of comparison site moneysupermarket.com will offer tips and advice on all things money-related to help iVillagers make the most of their hard-earned cash. From energy bills to car insurance; credit cards to children’s savings accounts; mortgages to discount vouchers Clare will show you how to make sure you’re getting the best deal
Why the stock market turmoil affects you
Heard the story about volatile stock markets and falling share prices? Probably, as concerns about the state of the global economy and warnings that the Euro is at risk of collapse have been headline news over recent days and we’ve seen billions of pounds wiped of share prices.
Finance Ministers from the world’s largest countries have been locked away all weekend trying to work out a rescue package – reportedly worth €2 trillion - to resolve the Greek debt crisis that is threatening the stability of European banks.
However, many people think this crisis has little to do with us here in the UK, but actually it could impact most of us.
Here’s a brief explanation of what’s happening and what it could mean for you...
What’s going on?
Share prices around the world plunged after the United States’ central bank, the Federal Reserve, warned last Wednesday that despite measures it has implemented to stimulate growth, the US economy remains perilously weak and a return to recession cannot be ruled out. Stock markets hate uncertainty and this news prompted global markets to go into freefall.
Europe is the epicentre
While it was news from the US that precipitated the latest round of share price falls, the debt crisis in Europe is the core of the problem.
Put bluntly the world is over-indebted. From individuals up to governments we have borrowed too much and in many instances, are now struggling to pay it back.
There are mounting fears that Greece is on the brink of defaulting on its debt repayments. Its government has already received one bailout but now needs another.
The problem is that the Greek debt crisis isn’t just a national problem because banks from other countries, particularly France, have lent Greece money. Therefore if the government misses loan repayments the financial stability of a number of European investment banks could be put at risk. Consequently, one of the elements of the rescue package is a capital injection to shore up the reserves of the banks so that they won’t be as vulnerable if Greece does default.
There are also fears that the problems Greece is facing could spread to other weak European economies such as Spain, Portugal and Italy hence the need for emergency action.
If that were to happen, the European financial system really would be in jeopardy as their debts are much greater than those of Greece.
What does all this mean for me and what should I do?
Think carefully if you have stock market investments
Selling your investments now means you will only crystallise your losses. While it may be extremely worrying seeing the value of your funds fall, most experts advise trying to sit tight and take a long term view. Investors frequently make heavy losses by panic-selling, so if you are able to weather the current storms you should probably try to do so.
People who are about to retire are among those hardest hit by stock market volatility as the value of their pension pots is likely to have reduced significantly in recent weeks. This means that less money is available to purchase an annuity with a potential reduction in retirement income for the rest of their lives as a result. Anyone contemplating retirement should seek professional independent financial advice before committing themselves to any particular course of action.
Spread your savings
While no one is warning that a bank is on the brink of collapse, given the current uncertainty it’s worth ensuring that all your savings are protected just in case the worst happens. Under the terms of the Financial Services Compensation Scheme the first £85,000 held with a single institution is protected (£170,000 if the account is in joint names). Therefore if you have more than £85,000 in cash savings you can protect it all by spreading it around between different institutions. For more on this, read our article ‘Who owns who?’
Pay down debt
Some economists are already saying Credit Crunch II has begun and even if the eurozone does receive a bailout, we may see banks and building societies restrict the availability of credit which could push up the cost of loans, credit cards and mortgages.
If you have any outstanding debt it is worth trying to pay it down now as quickly as possible because not only could we see the cost of borrowing rise, but credit may become harder to come by again.
It’s also important to note that many economists believe we could slip back into recession next year with some warning of decades of low growth ahead. This will have an impact on job creation and we may see unemployment rise so it’s worth getting your own personal finances in as strong a position as possible, just in case your circumstances change.
If you’re looking for a mortgage because your current deal has ended or is about to end, it seems unlikely that mortgage rates are likely to get much cheaper. With fixed and tracker rates already at historic lows, mortgage experts are recommending that borrowers snap these up while they’re still available.
There are already signs that mortgage rates may be about to climb with inter-bank lending rates having increased in recent weeks and if banks do become more cautious about lending again, borrowing costs will go up even if the Bank of England base rate remains low.