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Emegency mode - Protecting yourself from economic crisis

The year 2008 has been a difficult one for many families. A once invincible economy has fallen into recession, unemployment has risen and the stock market is in the dumps. Heading into 2009, many families are justifiably edgy about their financial situation. Here are some financial moves that might help families make the best of these times, courtesy of experts from the Financial Planning Association.

1. Build an emergency fund. A cash cushion of at least three to six months’ worth of bare-bones living expenses can help you through a job layoff, pay for a medical or legal emergency, or help you avoid selling stocks for cash in a down market. Fund the emergency account by tightening your budget or putting in extra income from a job or bonus.

2. Minimize debt. Now is not a good time to carry extra debt, even with lower interest rates, because of the risk of a job loss or other decline in income. Especially avoid high-interest installment debt such as credit cards. Pay debt down now while you have reliable income. Consider debt consolidation as long as you commit to paying debt down as rapidly as before.

3. Prepare for a job change. Even secure jobs seem less secure these days. Be alert for work alternatives or education opportunities, even within your own firm. Upgrade your marketable job skills through education. Assess objectively the future of your type of work: is it just the company at risk, or does the entire industry have a bleak future? Again, an emergency fund and minimal debt will give you extra time to find a suitable job.

4. Don’t quit investing. The last year has taught investors who’d been riding the up escalator of the stock market that markets also go down. However, market declines are not a reason to quit investing. Remember, you should not be investing in stocks or riskier assets for any goal that’s not at least five years away. Historically, most markets rebound, given enough time. The keys are to have realistic expectations, a long-term perspective and a diversified portfolio.

5. Be careful exercising stock options. Many workers caught up in the high-flying stock market exercised company stock options at a market high, only to watch stock prices plummet before they actually sold the shares. Taxes would be due based on the exercise price, but at that point, the employee didn’t have enough stock value to pay the bill, let alone leave anything for a profit. Work carefully with a financial professional to determine when is the best time to exercise and sell your stock options, and to be sure you’ve got enough funds for the tax bill.

6. Review your insurance coverage. The terrorist attacks on September 11, 2001 vividly illustrated the need for adequate insurance. This not only includes life insurance, but disability, medical, long-term care and, if you own a business, a variety of business coverages. Don’t rely on simple rules of thumb. Thoroughly assess your risk exposure and needs in order to determine what type and amount of coverage you should have.

7. Put your estate in order. For example, a survey by FindLaw found that only 11 percent of people between the ages of 18 and 34 have drawn up a will, and even a third of those age 54 or older don’t have wills. But don’t limit estate planning to merely a will. Families also should have living wills, powers of attorney and, in some cases, trust documents to ensure that the estate is properly handled.

8. Get your financial records in order. The market and economic turmoil should provide added incentive to do early a chore you’ve probably been putting off: organizing your financial records. First, this will give you a clearer idea of how financially healthy you really are (or are not). You can do this by determining your net worth (assets minus liabilities), which will give you a benchmark for future years. Having your records in order also will help you make better investment and budgeting decisions, as well as make it easier for survivors to contact financial sources and make financial decisions in the event of your death.

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