Advice to young: Prepare for risks

Billionaire investor Warren Buffett often has commented that you can find out who has been swimming naked when the tide goes out.

Now, don't rush off to Folly Beach with a tide chart in hand.

The "swimming naked" thing is Buffett's metaphor about financial risks that tend to be exposed during economic downturns, and it's as instructive today as it was in his 2001 letter to shareholders of Berkshire Hathaway.

His point was that insurance companies such as Berkshire's must recognize the potential for hidden risks and prepare for those times when the economic tide goes out. It's a lesson for us all, but particularly for all the young adults venturing out into this troubled economy.

Only in hindsight can we clearly see how irresponsible mortgage lending in places such as California and Arizona and the global trade in unsafe mortgage-backed securities that followed eventually led to teachers and firefighters getting furloughed in Charleston.

The trigger for recession is rarely the same -- oil embargo, dot-com bubble, real estate collapse -- but the result is similar. And this Great Recession has spread economic pain across the land, visiting pay cuts, job losses, foreclosure and bankruptcy on good people everywhere.

But recessions also mean opportunities for some -- those with money in the bank and good credit scores.

Notice two reports this month:

--The number of millionaires around the world increased 17 percent in 2009, Bloomberg News reported, and their collective wealth rose by 19 percent.

--More than a quarter of the consumers in the United States now have poor credit scores, 25.5 percent versus the historic average of 15 percent, The Associated Press reported. The percentage of consumers with top credit scores, however, remains well above average and is little changed from before the economic meltdown.

For those in a position to buy, housing prices are down and interest rates are at record lows. From new cars to vacations, everything is discounted when the economy goes south because everyone is selling and few are buying.

Government incentives even rewarded those able to buy a car or a house during the past year.

But for those with poor credit, such opportunities were largely out of reach, as troubled lenders hoarded government bailout money and feared that any borrower might turn out to be bare-naked, financially, when repayment time came around.

Many of us know friends and family members who, though thankfully still employed, were unable to get a loan to buy a home, refinance or make a home repair.

In a downturn, cash is king, and this recession should demonstrate to any young man or woman starting out on their own just how important it is to sock away some savings and protect their credit score.

Pay yourself first, as the saying goes, by treating a deposit into your emergency savings fund as a monthly bill. Sometimes there won't be any money available to save, but savings should come high on the bills-to-pay list, well ahead of things such as cable service and high-priced cell phone plans.

Recognizing that recessions come with some regularity, here are a few things you can do to always be prepared for the times of hidden risk:

--Check your credit reports every year and check for any mistakes that could harm your credit. The reports are free, but consider paying extra to get your FICO (credit) score. Visit www.annualcreditreport.com, the official website credit bureaus established to comply with federal law giving consumers free reports.

--Pay your bills on time, don't use more than half the credit available on any one credit card and don't apply for multiple credit cards in short periods of time.

--If you're paying a credit card balance, work to get it paid off, but do this today: Call the toll-free number on the back of your card, tell them you are considering other offers, and ask them to lower your interest rate. If you're paying an annual fee, ask them to waive it.

Reach David Slade at 937-5552 or dslade@postandcourier.com.