If you listen to bankers and politicians, what we really need right now if for banks to start lending again. Then, all the problems we now see; house prices falling, stock market panics, mass currency movements, will sort themselves out. It might not happen right away, but, they assure us, it will happen. They are wrong, and here’s why.

The last few years have seen a commodities boom; indeed, many say we have just seen the first stage in a long-term commodity super-cycle boom that still has 5-10 years to run. The result is that right now everyone is focussed on price inflation, as the cost of food, fuel and raw materials have pushed up the prices we pay in shops.

Yet move away from the headline inflation figures for a moment, and look at asset prices. Shares, bonds, house prices, all of them have been declining in value recently. This makes sense, because when raw material prices rise, companies must charge more for their goods, and so generally sell less, and make less profit.

Yet, as bad as things look, they may get a whole lot worse, all because of de-leveraging. For the past decade, and especially since 2001, easy access to credit has allowed hedge funds, investment banks and property tycoons to buy up huge amount of the world assets with borrowed money, all the while bidding up those assets prices.

As long as money stayed cheap, people could buy more assets, as long as people were still buying assets, prices kept going up and as long as prices kept going up, banks were willing to lend as they could always sell the asset themselves if the borrower failed to pay. It was in fact a giant pyramid scheme that depended on new players coming in and buying the assets from the owners with even more borrowed money.

Now however, the game is over. When house prices stopped rising it was a signal that the scheme had run out of new willing players, and so everyone who owned houses or any of the many bonds or stocks that depended on them, could no longer find someone to sell them to. The resulting crash was predictable, but the real problem was just how dependant banks had become on always being able to find new buyers for their asset-backed bonds.

Now, banks have closed the door on new lending, not just for house buyers, but to hedge funds and other investment vehicles. As a result, there is no-one able to pay the market price for their shares, bonds and other assets. This wouldn’t be so much of a problem, but hedge funds must sell assets to meet the now far greater interest payments on their loans, and to return money to investors.

The results of this forced selling have been seen in the recent huge falls of world markets. This isn’t individual investors or pension funds selling up, it’s over-leveraged mutual funds, hedge funds and investment banks having to sell assets to pay the bills. It’s the same for shares, bonds, commodities and even gold. The owners need the cash, so the assets get sold, regardless of fundamentals or price. And it’s only going to get worse, as a result of the vicious circle where a fall in asset prices means more cash is needed, leading to more forced selling.

For the small individual investor, things aren’t nearly so bad. Eventually asset prices will recover, and assuming you don’t trade on margin, no-one can force you to sell at today’s low prices. Unless you need to sell in the next few years, now is the time to hang on tight, and get ready to buy once the forced selling abates.

When most people think about stocks and shares, they tend start out with the idea that you try and buy stocks that are cheap, and then sell them later on when they are more expensive. However, this isn’t the only way to invest and make money from stocks. Today, more and more people are starting to focus on dividends, both as an investment strategy, and also a way of obtaining a steady passive income.

Up until its climax in the dot-com crash of 2001, the prevailing strategy for most stock market funds and individual investors has been to target “growth”, that is, to buy companies that are predicted to grow their earnings faster than the market average. The alterative was “value” investing, where shares are bought based on the idea that companies are “undervalued” due, perhaps to short-term problems or modest growth prospects. Both of these strategies, however, depend on selling a stock at some later date for more than was initially paid for it.

Contrast this to the position of a small business owner, perhaps of a flower shop or restaurant. They will receive money regularly in the form of profits and perhaps be able to live very well off this income alone for most of their lives. In principal, an investor who owns shares in a profitable company is no different than the owner of a profitable shop. True, there are many shareholders to divide the profits amongst, but then McDonalds has a lot more than 1 store!

The fact is that most companies do pay their profits out to shareholders, but few investors pay much attention to them, instead focusing only on the share price. In part this is because most popular growth stocks have low or even no dividends, their price based on future predicted earnings. It doesn’t have to be this way though, there are plenty of large companies available that have long histories of paying out a steadily rising divided to shareholders. Dividend yields (the yearly dividend payout as a percentage of the cost of the share) are available for many large, stable companies at more than 5%, far more than you can make from most savings accounts.

Investing for dividends is a strategy with numerous advantages. The most obvious is that a portfolio full of high-yield companies will be paying you money every year, money that you can either re-invest in more shares, or use to cover unforeseen expenses. This has the additional advantage of reducing the need to sell shares if you require cash, which can be very helpful if current market prices are depressed, as they are currently.

Also, in most countries, dividends are treated more favourably than other forms of income, often because a company will have already paid tax on its profits before it distributes the remaining money to shareholders. Finally, it’s possible to never actually have to sell your shares, after all, why sell something that pays you a steady amount of money every year? Certainly you will often be able to get away with less buying and selling than other investment strategies, which can significantly reduce brokerage costs.

For some investors, the income from dividends can be all the income they need, allowing them to retire early, or work part time, and even if your portfolio never becomes quite that large, the regular dividend payments can act as a powerful incentive to keep investing whatever the economic conditions.

If you happen to have watched the news during the past year, chances are you may have seen a mention or two of something called the “Credit Crunch”. You will have seen stories of banks going bust, stock markets in a panic, and grave announcements from Important People to “not panic”. Of course, that’s exactly the kind of thing that makes people want to start digging a hole in the back garden to keep their new gold coins in, but now is not the time to stop buying shares.

Not so long ago, back before the Dot-Com bubble, wise men with many letters after their name would calmly argue, all the while keeping a straight face, for something called the “Efficient Market Theory”. The market, they said, knew EVERYTHING there was to know about a particular stock or bond, and therefore, the current price the market was paying was clearly the RIGHT price given all available information. In the future things might be different, events might make a stock seem worth more or less, and the price would go up or down accordingly, but trying to out-guess the market, with today’s available information, was nothing more than a 50-50 bet, and stock pickers would do as well to use a dartboard as a broker’s recommendation.

How times change. While many people will still take a dim view of the recommendations of brokers, the idea that the market is rational should have died the day the Nasdaq went above 5,000. The events of the past 12 months are just another nail in the coffin of idea that large groups of people, risking large amounts of money, behave in ways that are in any sense “rational” or “efficient”. The plain and simple truth is that we cannot say that today’s stock prices are any more “right” than the prices of 1 year ago, but we can quite definitely say they are cheaper.

This matters because, as most successful investors through the years would agree, the time when you really make your profit on a stock is when you buy, not when you sell. For investors who plan to take a truly long-term view of the stock market, today’s prices present a wonderful opportunity to make much more profit in the long run, by buying shares cheaply today. It’s true that a number of companies have been caught out by global events, particularly banks exposed to bad housing loans, but anyone investing into a properly diversified fund or tracker product need not be worried by individual company failures.

True, prices may go lower still, which is why investors are often advised to drip-feed their money into an investment over a period of months or years, but the important thing is that by most long-term valuation methods, the market at today’s prices is cheap, and history has shown that investors who can summon the courage to take advantage of periods of cheap prices, are always rewarded, so if you have a pension or regular investment, keep on making those payments, and don’t let the gloom and doom of today prevent you reaping the rewards of tomorrow.

Are your monthly bills getting you down? Do you struggle to budget for food and clothing? In today’s difficult financial climate, millions of people are facing spiralling credit card bills and soaring mortgage costs. It’s time to fight back, and take control of your finances by Living Below Your Means!

The key to staying afloat financially is simple, live on less than you earn, and always have money put aside for emergencies. In today’s world of low job security and frequent unexpected costs, it’s amazing how many families are living paycheck to paycheck, with less than one months expenses set aside in savings. This is very dangerous, ideally every household needs at least six months expenses set aside in an easy to access savings account, but how can ordinary people earning low wages save up enough money to be safe? The answer is to live below your means!

Let us be clear, living below your means does not mean a low quality of living. All to often people mistake high spending for a high quality of life, but quite often the opposite is true. To begin with you need to focus on the unavoidable costs of running a household, Food & Clothing and Housing & Transport. Start with your food bill. Track every item of food and drink that you buy, and then at the end of one week, look over the list and see where you can save. Perhaps buying cheaper brands, or buying an item in bulk. Perhaps by buying more food from the supermarket, and less from expensive stores or eating out. Pay attention to any wasted food, and see if you can cut down on costly ready-meals or trips to the local fast food place.

Once you’ve cut back on your food bills, pick another essential area, such as utilities. Again, track your costs for 1 week, or if the bills are monthly, divide them down to get a weekly cost, and see what you really need. Are you paying too much on heating or air-con, running it during the day when no-one is home? Do you regularly watch every channel in your TV subscription package, or could you miss off a few? Do the same with travel expenses, fuel costs, clothing and grocery purchases, and you will find yourself saving possibly hundreds of dollars every month on essentials.

Once the essential costs are out of the way, begin looking at non-essentials. Again, track every cost, and think about the value for money of each purchase. Did you buy a DVD that you will only end up watching once? Did you get a new phone when the old one did everything you need? Are you renting a second car that you barely use? It’s all about identifying value for money, so you can cut back on the costs of things you aren’t getting real benefits from.

Once you’ve cut back you need to allocate your free money. This is important, unallocated money ends up getting spent regardless of good intentions. Ideally take money you have decided you won’t need directly from your account as soon as your paycheck clears. You are looking to do two things; first you need to build up a savings account for emergencies, so look for an easy-access account with a decent rate of interest. Keep this separate, and never use it for paying day-to-day expenses. This is your safety fund, you are buying financial peace of mind with your money, and it’s worth every penny.

Lastly, use perhaps half your free money to pay down your debts. Start with the debt with the highest interest, usually any credit cards or car loans, and then move on to your mortgage. If you are lucky enough to be without such debts, if you rent for example, then consider investing in things like energy-efficient light bulbs to cut down on your utility bills. By paying down your debts you will be increasing the amount of free money you have at the end of each week and be able to build up your security fund even faster!