Avoid financial disaster, make sure you’re insured

Nicholas Cage is broke. Depending on which side you believe, Cage brought about his own financial ruin with a spending spree that included two castles, 15 palatial homes, several yachts, as well as a fleet of Rolls Royces. According to Cage, it was his business manager’s fault and his mismanagement that led to Cage’s financial ruin. However, he is broke.

While you may not be a Hollywood star; if you own assets, you need financial protection. The news is full of celebrities who have gone bankrupt; MC Hammer, Evander Holyfield, Willie Nelson, Hulk Hogan, the list goes on and on. How could someone who earns more than 99% of the general public file for bankruptcy? Let’s examine some financial mistakes and how to avoid financial problems.

Being too generous with friends and family.

It is not wrong to be generous with friends and family. However, spending money on items that will alter your lifestyle is a bad idea. While Elvis could afford to buy every pink Cadillac General Motors produces, those with a salary of $50,000 a year cannot. If you’re so inclined to “spread the wealth,” be sure to include it in your budget. Breaking down your income and expenses will make it very clear how much you have to spend monthly.

sweating.

Being served with papers and being told that you are part of a lawsuit can be one of the scariest times of your life. If you own assets, you should sit down with a good tax attorney or accountant right away. A good accountant will show you how to structure them correctly. If you own income-producing properties, you should consider incorporating them into an LLC. What if there was a slip and fall inside one of your properties? All of your unincorporated assets would potentially be at risk. Are you adequately insured in the event of a car accident? Although unlikely, what would happen if you were in a car accident and killed two passengers in the other car? Are you adequately insured? Check with your insurance agent to make sure you have enough coverage.

Economic fall.

He’s been making a decent living for several years, maybe even six figures. You have a great apartment with a view of the water in the most elegant part of the city. You’re driving your favorite Escalade when you get a phone call on your new $1,000 cell phone. “We will close the office, we will lay off everyone from Friday.” Do you think this can’t happen? Ask those in the financial services industry. Bear Sterns had been in business for over 100 years. In the blink of an eye, the company was gone; a remote memory You may have already experienced an event very similar to this. The current unemployment rate is currently 10%. Most would argue that it is much higher, since those who are not eligible for unemployment benefits are no longer counted. As this crushing recession shows, good times don’t last forever. The Roaring ’20s gave way to the Great Depression in the 1930s. Some would say never. If you learn one thing; anything can happen. Those who decided to bury their heads in the sand and blindly buy houses with no down payment or buy stocks on margin have been buried financially; bankrupt with no way out. While an economic disaster can strike, how you react to the event is even more important.

Unforeseen illness.

According to CNN.com in 2009, approximately 1.5 million Americans will file for bankruptcy. Many people may put it down to excessive spending or a lavish lifestyle, but a new study suggests that more than 60 percent of people who go bankrupt are actually due to medical problems. As with auto and home insurance, having and maintaining health insurance is paramount. If you separate from your employer, you are eligible for COBRA benefits. Due to a new law, your employer must pay 66% of the insurance premium for 8 months. Don’t let your health insurance lapse.

Divorce.

According to a NY Times report, approximately 33 percent of all marriages will end in divorce; not the typical 50% as is commonly reported. http://freakonomics.blogs.nytimes.com/2008/03/21/misreporting-on-divorce/. If you happen to be part of that 33%, you will be affected financially. If the separation doesn’t kill you, the attorney fees most likely will. I don’t have to list everyone who has lost fortunes in divorce. Hire an attorney and have them draw up a good prenuptial agreement. While it may seem insensitive, think of it like divorce insurance!

Making sure you have financial insurance will take time and planning. Spend this time wisely and surround yourself with the best team possible. This will be made up of a financial planner, accountant or tax attorney, as well as an insurance agent. Do you exercise due diligence when seeking professional advice? Don’t be a victim of the next Bernie Madoff.

Opportunity abounds!

While some companies went bankrupt, suffered layoffs and fell on extremely hard times, others prospered. Look at Warren Buffet for example (the second richest person in the world). Berkshire Hathaway (the investment company that Buffet owns) has seen a 20-35% drop like most stocks. However, take a look at some of the moves Buffett has made during the recent recession/depression:

1) You bought warrants to buy Goldman Sachs at $115 per share while receiving a guaranteed 10% return on your investment. Goldman is currently trading above $160. Buffet can exercise the guarantees on him and buy Goldman Sachs at $115 or continue to receive a 10% return.

2) He bought all the shares of Burlington Northern.

3) Berkshire has spent $3 billion on General Electric Co preferred stock, $2.6 billion on convertible debt from Swiss Re (a Swiss insurance company), and a total of $750 million on securities from motorcycle maker Harley-Davidson. Davidson Inc. also bought debt from the packaging company. Sealed Air Corp and building materials manufacturer USG Corp. All of these investments generate annual payments of 10 to 15 percent.

Because Buffet was prepared for this economic downturn, he was able to purchase assets at bargain levels. He did this in the 70’s when he bought American Express, Coca-Cola and Proctor and Gamble. Buffet has proven time and time again that he has the financial intelligence to take advantage of a crisis situation. He had cash to spend when everyone else needed it.

Wrapping it all up

In closing, there’s no better time than the present to get your finances in order. Invest some time and bomb-proof your investment and your assets. As you’ve seen in the latest financial meltdown, those who are prepared don’t just survive, they thrive when the economy recovers.