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How To Financially Prepare For The Next Crisis

Submitted by on September 19, 2012 – 2:29 pmNo Comment | 2,531 views

crisisWe have seen how easy financial bubbles are created, and how easy they can burst. The financial crisis in 2008 again demonstrated how fragile our financial system is, and how important it is to prepare for potential future financial instabilities.

Although a sole individual has no chance to prevent any such crisis from happening, there are a few things each and every individual can do, in order to create a bit more financial stability. Such stability will potentially help him or her through tougher times, when it is most needed.

Make your finances visible

In order to mitigate your financial risk, the first thing you need to do is to make your finances, and that of your family, visible. This can be done via a simple Excel spreadsheet, or you may want to use a more extensive computer program, such as Quicken. The main point, is that you need to know exactly how much you earn at any given moment, how much your expenses are, and how your net worth is developing over time. Without this information, it is extremely difficult to plan anything.

Create an emergency account

An emergency account is a cash account, where you have cash available to use in emergency situations, immediately. The extent of such emergency accounts can be based on your current income, or on the expenses during a given time period. The baseline is, that the emergency account will give you a bit of financial freedom if things go wrong, for example if you lose your job, or if you need to conduct immediate repairs to your home.

Avoid short-term loans

Sometimes, taking a loan to make a purchase can be necessary. But in many cases, people take loans for clothes, vacations, or flat screen televisions, because they do not want to procrastinate the purchase until the time when they have enough funds available. The result is often an accumulation of debt. Since many people do not have an implemented system, which makes their finances visible, they also lose sight of all their debt. This might go well, until something unexpected happens.

Therefore, if you can it might be a good idea to postpone purchases and to buy them with available funds. If you have to take a loan, then it is important that it is used to purchase an item which represents a value, which you can sell if needed.

Use your capital for real estate investments

Under circumstances, real estate can be a good investment. Due to the size of the investment, it is inevitable that most people take a mortgage. Still, there are many different mortgages available, and the higher the mortgage on the object, the more risk. If you save up some capital, you are able to pay part of the real estate with your own capital, having to take a mortgage worth less than the value of your home. The big benefit here is, that if the real estate value decreases, chances are you can still sell the object (at a loss), but at least repay the full mortgage.

For example, if you paid 30% of the worth of your house with your own money, you can allow the object lose value of around 30%, and still be able to repay your mortgage. Combine this with an emergency account, you can make extra payments if necessary, or you can still make a few monthly payments while you lost your job, and sell the house quickly.

Spread your investments

If you invest your money, it might be a good option to look at possibilities to spread your investments as much as possible. This means, to include stocks and bonds in your portfolio, and to cover different industries and different regions. In the event of a next crisis, this does not mean that you will not lose money, but it does mean that a well spread portfolio has the potential of limiting the losses.

Understand each decision you take

Which ever decision you take, be aware that it is your decision. Therefore, you can assign consultants or other specialists to provide you with recommendations (think about a specialist giving you tips on which stocks to buy), but you should be able to understand and comprehend what he/she is saying. If you are not at all familiar with stocks and how the stock market works, than perhaps you might want to educate yourself about this topic first, before even thinking about buying a stock. Do not take the advice of other people for granted, or as a fact.

Wrapping it up

Nobody can prevent you from suffering financial losses, but common sense can at least limit these losses a little bit. What do you have to share in addition?

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