Ways to Protect Yourself in Shaky Economy

July 11, 2008— -- It's a turbulent time in the market. Gas prices are hitting record highs. Over a quarter of a million American homeowners are in a stage of foreclosure, according to RealtyTrac's June report. And today, fears that government-sponsored mortgage firms Fannie Mae and Freddie Mac are faltering sent the stock market on a wild ride.

So, what can people do to protect their pocketbook in this shaky economy? We asked for advice from two financial powerhouses: Suze Orman, finance guru and author of nine best-selling books, including her latest, "Women and Money," and Mellody Hobson, president of Ariel Investments, to tell us the seven things you need to know to survive the slowdown.

First, some good news from Mellody Hobson. "If you are a homeowner doing all you're supposed to do, you have nothing to worry about." But what if you're not "sitting in the catbird seat?" she said. Here are some tips to help get you through:

If you want to sell your house ...

It depends on the reason why you want to sell your house, Orman says.

"Do you want to sell it because you are just afraid real estate is gonna crash?" asks Orman. "If that's the reason, don't sell now."

But if you want to sell because you're worried that you can't make your monthly mortgage payment, she says, "You are going to have to slash your prices so somebody comes in and buys it from you."

If you are worried about losing your house ...

"If you are being forced to sell your home because you are already six months behind on your mortgage payment [and] you are about to go into foreclosure, nobody wants to buy your home — everybody on the block is selling a house. Now we have serious trouble," Orman says.

When foreclosure looms, homeowners have to make a tough choice.

"That's where you either have to look at a short sale, which means you are selling your home for less than what you owe on it possibly — and many banks are allowing you to do that — or sometimes you have to walk away or give the bank your deed in lieu of foreclosure."

"I'd be on the phone calling my lender immediately," Mellody Hobson says. "The lender has just as much incentive to keep you in your home, believe it not, as you have in wanting to stay there."

If you are trying to get a mortgage ...

"You are going to have to have perfect credit," Orman says. That means having a good FICO score, which Orman says is considered 760 or above.

"If you don't have a good FICO score — that three-digit number that determines the interest rates that you will pay on a car loan, a home loan — why would a bank want to lend you money?" Orman says.

The days of easy mortgages are clearly over. Banks are no longer willing to risk loaning money to people who might not pay them back.

"You are going to have to make sure that you have enough money to put down," Orman continues. "It's no longer 3 percent down, 5 percent down for a normal mortgage; it's gonna be 10, 20 percent to put down."

And if you don't have perfect credit? "You may be turned down," Orman says bluntly, or "you may not get terms that are favorable to you."

If you invest in the market ...

Keep investing and saving, Hobson says. "Do not give up on your 401K plan. This ia bump in the road. The U.S. economy has always gotten through these tough times."

"You are watching your 401(k) plan go down, and you think, 'Oh my God,'" Orman says. "But what you should be thinking is, 'I am 20, I am 30, I am 40 years of age. Oh my God, I don't need this money for another 20 or 30 or 40 years.' How fabulous.

"Because the truth of the matter is, if you are investing in either a good company stock with a small portion of your money — or good mutual funds that are in your 401(k) — you want these markets to go down. You want these markets to stay down here for a long period of time."

Orman explains, "The more money you put in, the more shares you buy. The more shares you have — 10 years from now, 20 years from now, 30 years from now — you are going to have a fortune in this when everything returns."

If you are looking for a college loan ...

"The truth of the matter is, student loans have dried up in some places," Orman says. "When money dries up, and the bank still has the money to lend, they are gonna be very particular who they lend it to — if in fact they lend at all."

Hobson agrees, but adds that the government has stepped in to put some "significant" programs in place. "That, at least, from where we were, is a huge improvement," she says.

If you are worried about retirement ...

"Be prepared to probably work longer," Orman says. "I know that sounds very harsh, but it may be true." Hobson agrees and adds that you may have to add a couple of years to your retirement plan.

Orman adds this personal rule of thumb for those right around the corner from retirement: "Unless you do not need this money for at least 10 years or longer," she says, "that is not money that belongs in the stock market."

After all, you never know what's going to happen to the economy. Instead keep that money in more liquid form, such as in CDs, money market accounts or indivudual bonds.

"You want to always be in a position that no matter what happens, you know what you have and nothing can happen to it. And that then allows you to retire and you feel better," Orman says.

If you're living off your credit card ...

It's simple. Stop doing it. "When you are using your credit card and you are buying things, these things are going to become more and more expensive," Orman says. "The more expensive they become, the more your credit card debt increases."

Orman has a suggestion about the best way to magically give yourself a guaranteed return on your dollar. "Where should you put your money? Do you want me to guarantee you an 18 percent return on your money? I'll tell you how to get it," Orman says. "Pay down your credit card debt."

Both Hobson and Orman said we should not panic over the Wall Street rollercoaster, adding that Freddie Mac and Fannie Mae hold or back more than half of the mortgages in this country, so the government would not let them go under. Hobson says, "When you count the mortgages they hold, the securities they back — they are too big to fail."