Reinforcing Principals of Personal Finance

The ripple effect of an economic bust

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Purse strings are being pulled tighter than ever as consumers brace for the ripples of the banking crisis to move to Main Street. While lawmakers warn of looming job losses and threats to retirement savings, the country’s economic climate has made understanding and controlling personal finances even more crucial as the nation weathers this period of flux.

“Right now, with this level of uncertainty, the last thing you want to do is not have financial protection,” said David Henson, founder of Wealth Management Network, L.L.C. Consumers will have to figure out how to free up money to help pay down debt or use as cushion in case of what Henson calls an “economic interruption.”

While financial gurus have long recommended the “cutting costs” remedy to help do this, Websites have been springing up to help make this effort easier. “I never met a single person who had no room to give in their budget or who I couldn’t find additional opportunities to scale back,” says Lynnette Khalfani-Cox, CEO and founder of The Money Coach L.L.C., and author of several books on personal finance. This may mean downgrading from that super premium cable package that offers 350 channels or skipping the morning double latte at Starbucks. She recommends using Lowermybills.com, which aggregates cost comparison data to help consumers find the best deals on a range of expenses including phone and insurance plans and student loans.

When it comes to priorities, Khalfani-Cox emphasizes that paying down credit card debt should be No. 2 on the to-do list, with paying the mortgage taking the top spot. “You’re used to hearing people say ‘Cash is king.’ Right now credit trumps all. Having great credit is better than having cash,” she says.

Henson disagrees. “We are in a period where the financial markets are at risk. Nobody knows how long it will last,” he says. “What you need to do is protect your ability to protect your lifestyle,” which may mean paying the minimum on a credit card balance in exchange for building up a cash reserve.

The degree to which consumers should hone in on paying credit card debt versus having an “income interruption fund” will vary by individual circumstances. While you can’t decide to do one and not do the other, for those who don’t have a cash cushion, paying the minimum on a credit card and stashing the rest of the cash may be a better bet.

“Don’t put yourself in a situation where you have to look at your 401k, IRA, or retirement savings to avoid financial hardships,” Henson says.

After major market fluctuation over the past few weeks and the merger of Wachovia and Citigroup coming on the heels of the collapse of Washington Mutual, banking customers have been reining in deposits and retirement savings, much to the dismay of many financial experts. Khalfani-Cox says it’s a huge mistake for most people to pull money out of a retirement accounts. “Nine times out

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