Surviving the Financial Crisis

When world financial markets are approaching panic mode, many investors and consumers feel they should take immediate action. But what kind of action makes sense? Buy? Sell? Hide money under the mattress? Stock up on tinned goods?

Probably not. Sure, you may consider changing the mix of investments in your portfolio to minimise the damage from falling share prices. But your main goal in uncertain economic times is to evaluate your current situation - both financial and job-related - and take steps to put yourself in a stronger position if we enter a recession.

A quick side note: What's the difference in a recession and a depression? We once heard it described this way: ?A recession is when your mates lose their jobs; a depression is when you lose your job.?

All economies move through cycles over the long term. Most of us realise that a downturn, no matter how severe, will eventually pass. What probably stresses you most when you pick up the financial section of the paper is the feeling of ?not knowing,? especially in the short term - not knowing whether your job is safe, whether your investments will stay afloat, whether the business you just started will survive, or even whether your carefully thought-out roadmap to early retirement will stay on track.

Fortunately there are ways to reclaim a sense of security in the face of uncertainty. Let's look at how.
Know Where You Stand. When times are good it's common to get ?financially lazy.? If your income meets or exceeds your typical expenses, it's easy to stop thinking critically about what you spend.

So, your first step is actually to take a step back and get a handle on your finances: income, debt, payments/expenses, discretionary spending, etc. Your goal is to know where you're starting from so you can make rational, logic-based decisions. Let's look at a few key categories:

?Net worth Your net worth is the difference (hopefully a positive difference) between your assets and your debts. Simply add up everything you owe: mortgage, loans, credit cards, etc, and subtract that total from your assets: home, automobile values, investments, bank accounts, etc. The difference is your net worth.
Your net worth is a reference point on your financial road map. Knowing your net worth - and the assets that make up your net worth - can help you through difficult times, especially if you need to tap into certain investments or even your home's equity.
A quick note: It's easy to fool yourself into thinking you have a high net worth because you have equity in your home. Say your home has a fair market value of $400,000 and you only owe $350,000. That results in an asset worth $50,000? but wait. You have to live somewhere, so can you really access that money in an emergency? Maybe, but maybe not, so don't be tempted to think you're in great shape because you have money in your home. Even if you sell the home to tap the equity, you'll need a place to live and you'll still to spend money for housing.

?Income and expenses Unless you're paid by commission, your current monthly income is predictable - even though the possibility of getting a pay raise in the near future may not be. But do you truly understand your expenses? Not just the bills you pay, but your discretionary spending, too? Take a few minutes and jot down all your expenses. Some are easy to determine; just reach for your bills and credit card statements. Others are a little tougher: petrol, food, entertainment, clothing, etc. Think hard about what you've spent in the last few months, and create a monthly estimate.
Then subtract your expenses from your income. Hopefully there's a surplus; if not, immediately tighten your belt. If you do have a surplus, are you surprised it's not larger than you thought? You're not alone; most of us spend more than we think we do. The key is to have an accurate picture of your monthly cash flow, both incoming and outgoing.

?Investments If checking your investment portfolio balance makes your stomach sink like recent share prices, we understand. But you simply need to do it. Not so you'll get scared and immediately sell, but so you'll maintain a clear picture of your financial situation. Warren Buffet is often quoted as saying that "The markets are a very efficient mechanism for transferring wealth from the impatient to the patient." Creating wealth is a long-term process; don't hit the panic button. But do know where you stand at all times.

So where do you stand? Keep in mind that most experts recommend having at least three and preferably six months of emergency cash savings on hand - that way you can continue to pay your bills if you're temporarily unemployed. If you don't have that kind of savings, work hard - starting now - to build that financial safety net.

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