Find out what top experts say are crucial financial changes
If all this fiscal gloom and doom has you down, don’t just wait it out, take action. We asked financial pros for their best advice on ways to safeguard your money and handle tough times.
Protect Your Retirement
Sure, you have to take care of immediate money issues, but your own future needs to be high on the priority list, too. As a general rule, you need to amass enough to replace at least 70% of your pre-retirement income once you retire. For example, if you’re making $50,000 a year prior to retiring, you’ll need $35,000 annually afterward. Depending on what type of lifestyle you want to lead once you stop working, you may need even more.
What to Do:
- Make sure you’re contributing to a 401(k), 403(b) or an IRA (and have it automatically deducted from your paycheck). If your company matches a certain percentage, at the very least contribute that much.
- Increase your mortgage payments. You’ll shave seven years off a 30-year fixed rate mortgage by making just one extra payment a year.
- Consider working a few years longer. You’ll bring in extra income, your assets will stay invested and you’ll beef up your eventual Social Security benefits, says Dayana Yochim, consumer finance expert at The Motley Fool and author of The Motley Fool’s Guide to Couples & Cash.
Know Where Your Money Goes
If there’s one thing our experts agree on, it’s having a realistic picture of your finances. “It seems obvious, but nearly half of us don’t know where we stand financially,” says economist Julianne Malveaux, PhD, president of Bennett College for Women in Greensboro, North Carolina. “We don’t track our expenses, we don’t have a budget and we don’t have a plan.” Now is the time to start. “You have to get a handle on your monthly cash flow — how much you spend, borrow and save,” agrees Yochim.
What to Do:
- Check out free online services like quickenonline.com and mint.com, which give you a snapshot of your cash flow.
- “Look for the leaks in your budget,” says Yochim. “Start with the biggest spending categories — meals, transportation, entertainment, miscellaneous. You’ll get the best payoff by slashing spending on your largest expenses. Every time you whip out your wallet, ask, Do I need to buy this?”
Build an Emergency Fund
If you or your husband lost your job, how long would you be able to stay afloat? Your answer reveals a lot about how recession-proof you really are. “As the economy continues to slow, more jobs will be lost and people who depend on overtime or commissions may find their incomes squeezed,” cautions Terry Savage, nationally syndicated personal finance columnist for the Chicago Sun-Times and author of The Savage Truth on Money. That’s why our experts stress two words: cash reserves. The amount may differ — some suggest three to six months’ worth of funds, others say 12 — but the reasoning is the same: It helps you weather a layoff, major medical expense or other crisis. “You can’t necessarily count on credit cards or a home equity loan to bail you out in a jam,” warns Liz Pulliam Weston, personal finance columnist for MSN Money and author of Easy Money: How to Simplify Your Finances and Get What You Want out of Life.
What to Do:
- Start socking away as much as you can into a high-interest savings or money market account, even if it’s $10 twice a month to start, says Weston
- Use an automatic transfer to ensure that it gets done every payday. You may want to select a bank that’s far from your home and forgo the ATM card. That way you’ll be less likely to raid the account.
- Now that gas prices are down, calculate how much you’re saving on weekly fuel and put that toward your cash reserves.
- Leave the credit cards at home and go on an all-cash diet. “Try it for a month,” says Yochim. ‘You could cut your spending by as much as one third.” That’s money to add to your emergency fund.
Now’s the Time to Invest in Stocks (Yes, Really!)
Given the state of Wall Street, your first reaction may be, Are you kidding? But the majority of our experts say that this is an ideal time to buy stocks. “The best thing you can do for your long-term financial well-being is to start investing, pronto,” says Yochim. “It’s like real estate. When housing prices are sky-high, it’s best to be a seller. When prices are falling, that’s when you want to buy. What we have right now on Wall Street is a classic buyer’s market.” You don’t have to be a financial whiz to get into the market; you just need to know the basics. Velshi suggests taking a few hours to learn about asset classes, diversification, asset allocation and rebalancing. There are plenty of great books that run down these basics, or check continuing education programs at nearby colleges for an affordable class.
Feeling nervous? Then take Velshi’s advice and stick to mutual funds, index funds or exchange traded funds (ETFs), which let you build an entire portfolio without the risk of buying a single individual stock. And go to cnnmoney.com/ali to assess your risk tolerance with seven simple questions.
Remember, you don’t have to invest a lot. And if you get butterflies just thinking about the inevitable dips, then don’t invest your money in one lump sum. A better strategy, according to Yochim, is to invest a fixed dollar amount into an investment at the same time each month. “It’s called dollar-cost averaging, and it prevents you from investing a chunk of money at the wrong time,” she says. “You buy more shares when prices are low and fewer when prices are high. Over time the average share price you pay is lowered by using this technique.”
Still unsure about getting into the stock game? Your best bet may be to see a financial advisor who can help you pinpoint your financial goals and devise a comfortable investment plan to obtain them, says Ric Edelman, chairman and CEO of Edelman Financial and host of a national radio show on personal finance and investing. “Don’t let the headlines distract you,” adds Edelman. “Stay focused on your long-term goals.”