Have you ever thought about how much more inquisitive you are when times are tough then when everything is going great? Have you noticed how much more attentive to detail you are when a bill is more than you expected versus less?
Whatever the current state of our economy happens to be, we have definitely, at times, reached a stage of concern and financial worry that has made us all ask ourselves and those with whom we do business a lot more questions.
With hard times come questions and with that in mind I have included some of the more frequently asked questions along with answers that I hope you will find helpful.
Q: How can I obtain information on the financial condition of my bank or credit union?
A: Most banks are publicly held and, therefore, are required to publish detailed balance sheet and profit and loss information. Sometimes this information is available on their web site and many banks provide copies of their financial statements at their branch locations. All credit unions are required to file a quarterly report detailing all relevant financial information. You can find this information at the website of the credit union regulating body, the National Credit Union Administration.
Q: What should I be looking for once I obtain this information?
A: Your objective should be to determine the overall financial health of the organization that you have entrusted to assist you in managing your finances. You can best accomplish this goal by zeroing in on two key numbers, namely the capitalization and profitability of your financial institution. While a detailed analysis would require a lot of time, energy, and expertise, a quick look at these two numbers will tell you a lot. Capitalization may best be described as the institutional equivalent of the equity in your home. It is the retained and undivided earnings of the organization and is best viewed as a percentage of the assets of the organization. That percentage will vary greatly among banks and credit unions, but as a frame of reference, a credit union is considered well capitalized if its capital is equal to or greater than 7% of its assets.
Profitability is pretty straightforward. Is your bank or credit union making money and, if so, how much? If not, how long have they been losing money and what is the plan to turn things around?
Q: How are banks and credit unions insured and to what degree is my money protected should my financial institution fail?
A: Your money is insured up to the exact same levels whether it is deposited at a bank or a credit union. In fact, banks and credit unions are regulated in almost exactly the same way, but by two separate entities. Banks are insured and regulated by the Federal Deposit Insurance Corporation (“FDIC”) and credit unions are insured and regulated by the National Credit Union Administration (“NCUA”). Both insurers provide the same amount of insurance to depositors, which is typically $250,000 for core deposits (savings accounts, checking accounts, money market accounts, and certificates of deposit).
While these numbers are the most widely known, there are many ways to obtain additional levels of federal insurance through your financial institution. Both websites, FDIC.gov and NCUA.gov have sections devoted to better understanding and calculating the levels of insurance available to you and your family.
Q: What steps can I personally take to lessen the impact of rising costs?
A: The best thing you can do is control your spending. Keep track of all of your expenses. Cut or reduce frivolous or unnecessary purchases and try not to incur any new debt unless it is absolutely necessary.
You can also take steps to reduce the interest rates you are paying. One positive that usually exists during economic downturns is the availability of better rates and terms on common debt such as home equity loans and credit card balances. Do your research and seek out those better rates and terms. You might be surprised how much you will save just by transferring existing loans and balances to lower interest rate products.
Q: What are some of the factors that influence the stock markets and housing prices?
A: When attempting to analyze any type of market behavior, it is helpful to remember that markets behave irrationally. There never is just one factor or a fully definitive answer as to why markets behave the way that they do, in good times or in bad. Conventional wisdom indicates, however, that cyclical markets will seek an equilibrium point.
Recent examples illustrate this point. The last time the stock market values dropped significantly was after an extended period of unprecedented increases in stock prices. At the time of the increases, the market performance far outpaced the supporting economic data so when values began decreasing it was viewed, by many experts, as a time of correction. The housing market also reflects this cycle. We experienced extreme and largely unexplainable home value appreciation for several years prior to a few years of depreciation. In many markets, housing prices have started to increase again as buyers create new demand. Once that demand begins to outpace the supply of homes that has built up in recent years, prices will increase to an even greater extent.
While the extent of these cycles is yet to be determined, it is very reasonable to expect that a sense of normalcy will return to both the stock market and the housing market. It also helps to remember that the best time to buy and invest is typically when the price is low so if you have the ability to do so, it is a good time to look at your options and make some wise investments, whether they be in real estate or stocks.
Of course, there are many more questions to address during tough times. In fact, there are probably more questions than answers, but here are some summary points:
Before you make any decisions, take the time that is necessary for you to do your research and to carefully consider both your needs and the options that you have to meet those needs.
If you can get a plan in place to help you cope with the hard times and adversity, you will be well positioned to fully enjoy the good economic times when they return.
National Police Credit Union Contact:
For more information on National Police Credit Union, please visit our website or call 844.COP.SAVE.
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This article was written by Scott Arney, CEO, Chicago Patrolmen’s Federal Credit Union. This article is part of Scott Arney's educational series, entitled The Serial Decision Maker.