How to Survive the Financial Crisis

The financial crisis that has gripped the country for the past two weeks has already created widespread confusion about what these problems might mean for ordinary Americans.

Now, news that Congress failed to pass a hotly contested financial bailout package is leaving some people even more uncertain about how their personal finances might be affected.

While the bailout is principally aimed at the financial system, the impact of not passing it could be felt throughout the economy.

"Don't expect things to get better in the next while," said Brian Bethune, U.S. economist with Global Insight. "The underlying economic conditions are not good, and this is not going to help."

Here’s what you should know about how the crisis might affect your personal finances.

Checking and savings accounts
News that major banks including Washington Mutual and Wachovia have been pulled down by the crisis has sparked fears about whether Americans should trust their banking institutions to stay solvent.

Most banks are expected to continue functioning normally. Still, it pays to take a few simple steps to protect your assets in the event of a bank failure.

First, make sure that your bank is backed by the Federal Deposit Insurance Corp., better known as the FDIC. If your bank is a member of FDIC, then your individual accounts will be insured for up to $100,000, and your joint accounts should be insured for up to $200,000.

If you bank with a credit union, make sure that it is insured under the National Credit Union Insurance Fund, which provides similar protections for credit union account holders.

Retirement investments
The FDIC also provides coverage of up to $250,000 for certain retirement accounts, such as IRAs that are held in FDIC-insured financial institutions. If you have more than $100,000, it pays to check out the FDIC's online deposit insurance estimator.

Brokerage accounts
While most of us expect to see gains and losses as a result of investing in the stock market, some have raised concerns about what happens if the company that holds your investments runs into trouble.

If you are concerned, check to see whether your firm is a member of the Securities Investor Protection Corp., or SIPC. Created by Congress in 1970, SIPC covers investors for up to $500,000 in the event a brokerage fails or securities are stolen.

It’s important to note that this does NOT protect people whose investment portfolios lose value because of drops in the market or bad investments. That’s because investing in stocks and bonds is considered to be a risky endeavor, with upsides and downsides.

“They’re not guaranteeing the value of the stock,” said Barry Ritholtz, chief executive of the research firm FusionIQ and author of the forthcoming book “Bailout Nation.” “They’re guaranteeing $500,000 against the company going belly up.”

Some brokerage firms also have supplemental insurance for certain investments, should their brokerage fail.

Money markets
Money market funds often have been considered a safe haven for stashing cash that you don’t want in riskier investments, such as stocks. Recent troubles at one large money market fund sparked concerns that even these investments — considered by some to be safe as cash —are not completely secure.

Hoping to quell the anxiety, the Treasury Department recently stepped in to provide guarantees for money market funds, using a Depression-era fund to back them.

Mutual fund firms, also, have taken steps to comfort worried investors, including disclosing money market fund holdings and posting information about their investment decision-making.

Russ Kinnel, director of mutual fund research with Morningstar, said the best way to assure that your money is safe in a money market fund is to choose a relatively large, low-cost fund from a large company. Those steps should make it less likely the fund will make riskier investments, and more likely that the firm itself will make investors whole should the fund “break the buck,” or fall below the target of $1 per share.

Consumer credit
For many Americans, the credit crunch that is a key factor in the current financial crisis has been a relatively abstract idea, affecting mainly large financial institutions. As the crisis unfolds, economists say we could start to see more of an impact on people’s everyday lives.

Consumers who are trying to borrow money for a new car or new home, for example, might  find it harder and more expensive to get a loan. Some might find it tougher to get a new credit card, said David Wyss, chief economist with Standard and Poor’s.

People who already have credit cards likely won’t see much change, although Wyss said some credit card companies are starting to reduce credit lines for riskier clients.

“They’re getting tougher on who they lend money to,” he said.

Bethune said those conditions could get even worse now that the bailout is up in the air.

Business credit
Economists are watching closely to see if the credit crunch is going to make it harder for small- and midsized business owners to borrow money.

That, in turn, could crimp their ability to do business, leading to layoffs and affecting related businesses. It also could make it tougher for entrepreneurs to find money for starting new businesses.

The crisis on Wall Street shouldn’t have a direct impact on people who are paying their mortgages on time.

If you are seeking to refinance your mortgage or take out a second mortgage, however, you may find it to be more difficult, if not impossible, because of stricter lending requirements.

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