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Riding out the Rough Economy

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04/01/2009 - Riding out the rough economy

by Christoper Crossen, CFP

Experts may disagree about whether our economy is in a recession, but most agree we are facing the worst financial crisis in recent history. Wild stock market swings, widespread home foreclosures, business bankruptcies, growing job losses and rising consumer prices are affecting the financial stability of Americans. Fortunately, recent interventions by the government as well as New Deal reforms such as Social Security and FDIC insurance help prevent unemployment and inflation rates from reaching Depression-era levels. Here are some steps to help protect your personal financial circumstances as best you can:

Increase your cash reserves. With the wildly swinging stock market and potential for layoffs, it's wise to have a liquid emergency fund at your fingertips. If you can, sock away cash in a saving or checking account for more flexible access to your funds. Bank deposits are backed up to $250,000 by FDIC insurance per account. If you are considering warehousing savings in a higher interest bearing money market account, give some thought to whether the minimum balance and withdrawal restrictions will tie up too much of your cash. Similarly, certificates of deposit (CDs), which provide a fixed interest rate for holding a deposit for a set period of time, can also limit access to your money in the short term.

How much cash should you save? Ask yourself how long you could get by if you were to lose your job. Would you be able to pay your mortgage, car payment, credit card bills and other miscellaneous expenses for a couple months? If you are able to do so, gather up to six months of income to have on hand if financial calamity strikes.

Reduce spending. One way to hang on to your cash is to find ways to cut back on daily spending and postpone major purchases. You can make this task easier by creating a budget and sticking to it. Try to be realistic but not overly indulgent. If money is tight, you might consider reducing the amount you are spending on "nice to have" items, such as entertainment, vacations, holiday spending, etc.

If you have limited cash reserve to help you stay afloat in the event of catastrophe, you may need to take more drastic measures to weather the financial storm. Sell the extra car to eliminate your car payment or pick up a second job, lower your transportation costs by carpooling, eliminate unnecessary shopping trips and simply stay at home. It can be tempting to overspend on food since it is a necessity, so make a list before heading to the store and stick to it.

Keep your cool. While there are no guarantees that the economy will improve in the immediate future, history gives us reason to be optimistic. Stay calm and focused and continue to save aggressively, spend conservatively and avoid panicking. Seek assistance from a financial advisor to develop a financial plan that will help you identify ways to preserve capital and make progress toward your goals during this challenging economic climate and beyond.

This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors.

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