What the financial crisis means for you and your money

It's easy to feel panicked with titans of the financial world like Lehman Brothers, Merrill Lynch and AIG either failing, selling out, or getting taken over by the government this week. The financial world is truly in crisis, but that doesn't necessarily mean your money is now at risk.

Take a deep breath and read on as we take you through 12 personal finance topics and explain what the mayhem on Wall Street means for you:

For your stocks: No doubt about it, the market is going to be swinging wildly for the next few months. Predicting the direction of stocks is all but impossible, but it seems likely the major indexes will be down from here at year-end. That doesn't mean you should sell. But if you will need some of that money in the next year or two, use upswings as an opportunity to gradually exit your riskiest positions.

For your mutual funds: Many mutual funds have been heavily weighted in financials (especially value funds, which buy stocks that seem cheap), so you may be feeling the pain now. But you can bet your fund managers are working feverishly to recover. If you sell now, you miss out on a chance at a rebound. Still, in times like these, index funds prove their mettle. At least you don't have to worry about doing worse than the market.

For your bonds: Treasury bonds are increasing in value as demand for the safest of securities soars. Bond funds are holding up quite well this year. To be sure, some funds that held corporate bonds issued by Lehman Brothers and other failing financial institutions have taken it on the chin. But if you had your savings in government bonds, you should be feeling pretty pleased with yourself about now.

For your home: As long as you can pay your mortgage and don't plan to move in the next two years, you don't have to worry about a thing. The current crisis may mean pricey neighborhoods populated by finance types slip in value. And the weakening economy will keep pressure on housing prices across the country. But rates are falling and that should stabilize housing values.

For your credit cards: For starters, keep in mind that even if your credit card company fails, you still need to pay your bills. Your account would just be moved to another lender. Also note: Banks will be looking to increase profits by issuing more credit to folks with good records, but it won't be cheap and penalties and fees may increase. Be extra careful now NOT to run up costly credit card debt. It may be harder to pay down in a weaker economy.

For your retirement accounts: If you have at least five years until retirement, don't worry about a recent decline in your plan's value. Don't even check the balance if you can help it.k The only caveat to that is if you have company stock in your retirement plan or are not properly diversified (more on finding the right mix of investments). Look at historical returns. Even severe down turns seem insignificant over time as the market historically rises. And plan assets are protected, even if the sponsor fails.

For your savings account: If your savings is in an FDIC-insured bank, up to $100,000 in deposits is protected. Even if the fund that insures those accounts is tapped out, the government would cover your balance. If your cash is in a money market mutual fund, you don't have FDIC protection, and there is a slight chance you could lose a few cents on the dollar and face limits on withdrawals. A bank money market account is an even safer bet.

For your insurance: Since AIG, the worlds' largest insurer is getting bailed out by the government, you don't need to worry too much about your policy for now. In fact, you probably wouldn't have had to worry even if it had failed, since AIG's consumer insurance subsidiary was never in trouble. Plus, in cases where an insurer goes bankrupt, the state regulator takes over and makes sure policies (including annuities) are paid.

For your mortgage: Even if your lender fails, you still need to pay your mortgage. It will likely just be transferred to another institution. And there is some good news here: Mortgage rates are headed lower and banks want to make profitable loans to people with good credit, so you may get an opportunity to refinance at a lower rate soon. Home equity lines of credit are also a good deal now.

For your brokerage account: The government protects brokerage customers from losing assets due to a firm going bankrupt (for more information, visit SIPC). Even at Lehman, customer accounts seem to be quite safe now. However, it is very difficult to get back money that was badly invested by you or your stock broker. And the stock of companies that declare bankruptcy are usually worthless.

For your ability to borrow money: If you have good credit, you may find it easier to borrow money in the future, due to the current crisis. Interest rates on some kinds of loans are coming down and banks are eager to increase profits by lending. But be careful of taking on too much debt in case the economy worsens and it gets harder to pay it back. If you have weak credit, you may be out of luck.

For the economy: This is probably the biggest worry for the average American. Can the economy keep growing amidst a global credit crisis (and a falling dollar, rising unemployment and inflationary pressures)? Recession is more likely, which means heightened job insecurity. So, start saving. If you can't cover at least three months of expenses should you become ill or lose your job, go on an austerity plan. A cash cushion is the best umbrella in this financial storm.
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