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Stay Flexible: 3 Financial Tips for Facing the Future

By sbup Staff

In today’s difficult economy, one of the only things you can be certain about is that no one knows what's going to happen next.

Even comments by Federal Reserve Chairman Ben Bernanke, that "the current recession will end in 2009 and that 2010 will be a year of recovery," hinge on whether the Administration, Congress, and the Federal Reserve can restore some measure of financial stability.

In other words, if government intervention has the desired effect, we may find ourselves out of this economic jam by next year. But if it doesn’t, then batten down the hatches and be prepared for more pain.

Faced with this kind of uncertainty, what's the typical individual to do? The best advice is to be flexible, according to Kathleen Piaggesi, a certified financial planner and owner of New York-based K/A/P Planning Advisory.

Here are three tips to make sure your finances are flexible enough to handle uncertainty.

1. You can never have enough cash. If you suffer a loss of income, you’ll need to have enough money on hand to cover your expenses. "There was a time when you could advise certain clients that they didn't need a rainy day fund and that they could rely on credit lines to see them through,” says Piaggesi. “Nowadays you can't count on that credit line being there when you need it." Find out how much you should save in your rainy day fund.

2. Pay down debt – wisely. It’s important to tackle your debt, but rather than rushing to rid yourself of the big D-word, only pay what you need to pay. "Pay what you have to pay to keep your credit score up and maintain your access to credit," says Piaggesi."But I wouldn't be too aggressive about giving away more cash -- once you've paid your debt down that money is gone." Try not to use more than 30% of your available credit, otherwise your credit score can take a hit.

3. Deposit your money wisely. Consider using the same flexibility lens when deciding where to keep your money. Deposit accounts are generally the safest place for your money, but only if you can access it when and if you need to. For instance, residents of New Jersey may want to reconsider locking up their money in 24-month CDs -- such as one from Citibank (Stock quote: C) earning 2.75% or from Capital One (Stock quote: COF) earning 3.0%. Instead, they may want to get a money market account, such as the one from Bank of America (Stock quote: BAC) with an interest rate of 1.25%. CDs aren't very flexible because you usually have to pay an early withdrawal fee if you try to access the money before the CD matures. Given the uncertainty, two years may be a long time to have your money out of reach for just a few extra percentage points' worth of interest.

Still, if earning interest is important to you, consider a CD ladder as a compromise between earnings and flexibility.

Whatever you decide, maximizing your financial flexibility is likely to be a winning plan to face down the future’s uncertainty.

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