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The financial crisis sweeping Wall Street and global banking and financial institutions has understandably raised alarms among consumers on the risks to their savings, retirement and brokerage accounts. Here are some pointers on navigating the financial minefields.
How does this crisis affect you?
Many individuals close to retirement have all their eggs in baskets comprising mutual funds and stocks, which have seen their values drained of one-third of their capital. It is a big blow for them and many will suffer consequences for years to come as the withdrawals can't meet their needs.
People who are saving up for their children's college education also have sustained major losses, but many of them still have time on their side as market conditions improve. Families who put their money in savings accounts and CDs, are weighted by the dismally low interest earnings on these accounts.
Products and services from distressed companies will also likely suffer and employees in these companies are at risk of losing their jobs. Cumulatively, this economic meltdown is likely to have a huge impact and it will likely stay that way for a long time to come.
What can you do to avoid losing your money?
There is no silver bullet solution. But there are a number of things you can do to secure your savings. If you are already invested in the financial market directly as a stock investor or indirectly through your mutual fund portfolios, just stay put and don't do anything. This turmoil will eventually subside and your portfolio might emerge better in a few years. If you cash out now, you might take a big hit. You can't withdraw your funds from your retirement and 529 accounts anyways, although you can alter the distribution of your portfolio. For that you should seek advice from your financial advisor or fund counselor. Don't follow the herd. You need someone to analyze your particular portfolio. If you have more than $250,000 in deposits in one or more accounts in one bank, try to split it up and put it in different banks or financial institution.
You are only covered by FDIC (Federal Deposit Insurance Corporation, an independent federal agency) insurance or NCUA (National Credit Union Administration, another federal agency) insurance as one person for all your accounts in one bank. If you have a joint account, you are covered up to $500,000 in that particular bank or credit union. Many people lost their money during the IndyMac bank failure as they had more than $100,000 in that bank (the amount FDIC insured until recently, when it raised it to $250,000). Don't make that mistake.
What bank to open an account?
No one really knows which bank is safe or at risk at this time. Even the CEOs of the financial institutions are unsure. But you don't have to worry about the institution. Whether it's a local or national brand bank or a credit union, so long as it is FDIC or NCUA insured, you are covered up to $250,000 in that bank
What is the guarantee for my funds in bank and brokerage accounts from the government?
Let's split these questions. Your bank or financial bank accounts, like savings, checking and CDs are covered under FDIC or NCUA. Even your money market account is covered under these insurances only up to $250,000 per person. It is a common misconception that each account is covered for $250,000. In fact, the total amount in all your accounts in a single bank is covered up to $250,000.
Retirement accounts, such as IRA or Roth IRA in banks or credit unions, are covered separately. After recent legislative changes, insurance coverage on certain retirement accounts, such as IRAs and Keoghs, is extended for up to $250,000 in both banks and credit unions covered by FDIC and NCUA.
Next, let's get to your regular investments in a brokerage account or 401k. What happens if your brokerage firm fails? Hold onto your stocks and bonds; they are most likely safe. SIPC, the Securities Investor Protection Corporation, a nonprofit, membership corporation funded by its member securities broker-dealers, seeks to restore funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.
Of course, there is no insurance against market losses. However, as long as your securities are registered in your name, or are in the process of being registered, you own them, no matter what happens to the brokerage. You just need your statements to prove ownership of the securities to receive your refund. The SIPC covers customer up to a maximum of $500,000, including a maximum of $100,000 on claims for cash.
Can I convert my dollars to Rupees to be safe?
That's a very good thought and not a bad idea. With the dollar value declining against the Euro and Yen, it is eventually good news for NRIs as the dollar is appreciating against the Rupee in the past few days. At the end of September it was up to Rs 46 for a dollar. You can move your money to your NRI account and convert it into rupees. But keep in mind, different accounts have limitations on repatriating the money back and you will lose a lot of money in the exchanges. But if you want to use your funds to purchase something in India, such as real estate, it is likely a good idea to convert your dollars to rupees.
Conclusion
We are experiencing a deep economic downturn. Eventually, however, the clouds will dissipate. We have already started seeing some signs, like slowing down in the decline in home sales, which is an indication that the housing market could pick up. It is important, because when the housing market stabilizes, the economic conditions will improve. Be hopeful, be patient. That may be hard to do, but there is little else you can do, but sit back and watch the market roller coster play out.
| In our inaugural monthly column on personal finance, Vijaianand Thirnageswaram, host of the blog moneyreallymatters.com, offers pointers on protecting your money in the current financial meltdown. Readers may submit questions to this column by emailing money@littleindia.com |
Disclaimer: This column is intended for informational purposes only and does not constitute financial advice. |
