How To Protect Our Finances From A Market Crisis?


[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

Protect Our MoneyWith the stock market nose diving and banks failing every other day, it's natural to think about protecting our hard earned money and assets from the current financial crisis. For a common person, most of his/her assets are either stowed away as savings in a bank account, or invested in a portfolio in the stock market or vested in "material" assets like real estate, precious metals, automobiles and likes.

Now how do we go about protecting our assets while the economy is in turmoil? Here are a few tips that we've put together from our earlier experiences and practice:

Don't Panic

Do not let what you cannot do interfere with what you can do - John Wooden
Don't PanicFrom experience we've found it's best to keep a check on the amount of news we feed into our heads. Too much of the so called "expert" opinions about a situation only helps in increasing confusion within us. No one knows what is going to happen. Things could definitely get better. It pays to hope for the best and be prepared for the worst. In that light we find it useful to focus on what we can do and do it well.

Put our money or investments in federally insured banks and brokerage firms

Place money in safe placesThis implies that we should check whether our bank deposits are insured by FDIC. Most banks that are members of FDIC insure our deposits up to 100k. If our total money at a bank exceeds 100k we've got to buy our own insurance from FDIC to protect it. Or we can spread our money across different banks (members of FDIC), keeping less than 100k at each one.

The same rings true for brokerage accounts. We need to check that our brokerage firms are members of SIPC. When a member brokerage firm fails, the SIPC arranges the transfer of the failed brokerage's accounts to a different securities brokerage firm. In case it is unable to do so, the failed firm is liquidated and SIPC sends investors either certificates for the stock that was lost or a check for the market value of the shares. If sufficient funds are not available in the failed firm’s customer accounts, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims.

It is to be noted that SIPC does not bail out investors when the value of their stocks, bonds and other investments fall for any reason including fraud. In other words it does not guarantee our investments' value.

Get our "emergency fund" in place

Emergency Fund in PlaceIrrespective of whether the market booms or crashes, our short term needs remain the same. So we should be prepared to meet them come what may. This is where an "emergency fund" comes in handy. We usually keep six months of living expenses in a high yield savings account as our emergency fund. In case we get the pink slip, this fund will cover us till we get another job or income going. For new investors, the emergency fund should have a higher priority over investing in an unpredictable stock market.

Minimize unnecessary expenses

Cut Down Unnecessary ExpensesWhen the going gets tough in a slow economy, we usually hold on to a strict budget and ruthlessly cut down on unnecessary expenses. It always helps to have cash in hand if a rainy day comes along. Also, we try to declutter our home by either donating or selling stuff online to keep ourselves as light as possible. Saves a lot of energy, time and money in maintenance and moving costs.

Hold onto our jobs

Keep JobThis might be a good time to be an excellent employee and keep our job intact. As a back up measure it'd be definitely smart to polish our resume and add some extra skills to our repertoire to be prepared for the worst. Another good move might be to touch base with old friends and networks to widen our options of getting a placement in case of a job loss.

Look for lower rates to refinance our mortgage

Refinance mortgage at lower ratesWith the market in turmoil and a subsequent collapse in the interest rate on long-term U.S. Treasury bonds, it might pay off to keep an eye on the mortgage rates. If we get a rate which is considerably lower than our current one, then by all means we should go for a refinance. But before jumping in, we should carefully do the math to take into account every fee involved in a refinancing.

Long term investors should look for opportunities to invest in value based stocks

Invest for long termIf our emergency fund is in place and we are courageous enough to be long term players in the stock market then this is a golden opportunity to buy valuable stocks at low prices. But before that we should have a guiding philosophy for our investing, revisit our goals and risk taking capacity. Also, it might make sense to get rid of dead stocks i.e. the ones that will never ever recover, from our portfolio. The losses can come in handy for our taxes at the end of the year. After all, we all know who's going to shoulder the cost of the multi billion dollar bail outs.

We look forward towards your opinions or thoughts about protecting our assets during a market crisis or economic turmoil. Do drop in a comment :).
Life is not always a matter of holding good cards, but sometimes, in playing a tough hand well - Robert Louis Stevenson
Image Source(s): iStockPhoto

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