Not sure how to proceed with your finances in this brutal economy?
Take a breath. Calm down. Make good choices.
The Savage Truth on Money Never Changes!
When I started writing my weekly Chicago Sun-Times column exactly 20 years ago this month, my goal was to explain the basics of money management -- the things we weren't being taught in school.
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Those principles evolved into four books, all with the same message, the same Savage Truths about money. And in spite of today's frightening stock markets and deep recession, I believe they will hold true for the next 20 years, and on into the future.
The Savage Truths have one common denominator: All require your willingness to face reality, learn the basics, and trust your instincts. You do not have to become your own financial expert. Few have the time or inclination to do that. But you must take the ultimate responsibility for your decisions, no matter whose advice you seek. It's your money -- and no one cares about the outcome more than you!
Don't be overwhelmed, even when the economy is most frightening. Tough times bring great opportunities -- even for those who are touching bottom these days. Deal with the issues, one at a time. Here's a guide for getting started, using those basic Savage Truths:
It's a truth that wasn't always apparent -- whether the issue was home mortgages or credit card debt.
I argued in vain for many years that people should lock in fixed-rate mortgages and try to pay down their mortgage debt as soon as possible by making additional principal payments each month. Entering retirement with a paid-off mortgage is a luxury that too few people will enjoy now. But it's not too late to start a mortgage paydown program.
You're about to get a once-in-a-lifetime chance to lock in very low mortgage rates, likely below 5 percent in the coming months. Of course, that presumes that you still have equity in your home, and a good credit report. Even those who don't think they'll qualify for a refi should be alert to new mortgage programs designed to rescue those who are in jeopardy of losing their homes.
I believe that soon banks will make creative "negative equity" mortgages -- loans beyond the current value of the home -- just to keep from having to foreclose and book the losses. And instead of waiting until people have missed payments, they'll turn their attention to prevention instead of disaster recovery. So it will be worth your efforts to keep paying that mortgage, if possible. If you can't, contact your bank immediately.
Many years ago, I explained that making only minimum monthly payments on a credit card is a dangerous delusion. In my books and speeches, I pointed out that if you paid only the minimum on a $2,000 balance, with a 19.8 percent interest rate, it could take as long as 31 years to pay it off -- and that you'd pay four times the original purchase in interest charges along the way!
Today, Americans have nearly $1 trillion outstanding and revolving on credit cards. And half of those accounts are making only the minimum monthly payment. Even worse, those who are late even by a day, or who exceed their credit limit, will pay rates as high as 30 percent, even on major credit cards.
Don't wait for the bank to cut your limit or raise your rates. Sit down now and make a list of all of your card balances, the rate, and the minimum monthly payment. Start with the card that has the highest rate first. The secret of paying down your balances is to double the current minimum monthly payment and keep paying that same amount every month. If you do that, and don't charge another penny on that card, it will be paid off in about two years.
Beware of debt consolidation and negotiation services. They require you to stop paying the minimums, pile up money in a savings account, and then, with enough cash available, they'll negotiate a settlement after taking out their fees! Banks are wise to this and may trigger a suit and wage garnishment against you after you've missed a few payments and further ruined your credit.
Instead, contact Consumer Credit Counseling at (800) 388-2227, which will put you in touch with the nearest local office. They'll be able to advise whether they can help you work with your creditors, or refer you to bankruptcy.
It's a term that I coined long ago to describe the cash that cushions the blows of tough times like these. You'll never "save" money if you see it sitting in your account at the end of the month. So I've always advised an automatic monthly withdrawal -- much as Social Security is taken out of your paycheck before you see it and spend it! Chicken money is placed in short-term insured accounts, such as CDs or money markets. These accounts pay very low rates of interest, but that's not the point. You're looking for safety, not yield.
Use a separate money market deposit account at your bank, or a money market mutual fund to have a monthly deduction from your checking account. Or buy Series I savings bonds through the payroll deduction plan at work, or Treasury bills direct from the government at www.TreasuryDirect.gov (minimum purchase $100). Remember, they're taking Social Security from every paycheck, and you "can't afford" that, either!
By definition, you won't face a crisis if you have chicken money. If you don't, you'll have to raid whatever savings you have. In a crisis, and without a job, you can't pull any remaining equity out of your home. A hardship withdrawal from a retirement plan is your next place to turn, although it will create a tax bill down the road. And with no place to turn, you have to start selling personal possessions, calling friends, or seeking help from church or community organizations. Don't let pride stand in your way. When you make it back -- and you will -- you'll be able to help others.
In spite of the stock market crash, and more declines that may be coming, I continue to believe that the best way for individuals to make their money work for them is through the stock market. But it's important to understand that the "long run" can be a very long time. That's why it's important to keep a balance between enough "chicken money" that lets you ride through a bear market, and a diversified long-term investment portfolio. How much you should have in each category depends on your own financial situation, your age, and risk tolerance. Qualified advisers can give you perspective; only you can listen to your heart.
Face facts, and don't mourn money that was lost. You weren't surprised when the money grew in your investment account; don't be shocked when it shrinks in a bear market. Now you must evaluate your personal situation and make plans for the future.
People always react to their most recent experience -- buying when they see others making money, and selling in a panic. Absolutely no one can guarantee when the market will bottom, so you're best off using historic returns. And there has never (since 1926) been a 20-year period when you would have lost money in a diversified portfolio of large-company U.S. stocks, with dividends reinvested. Do you have 20 years, knowing you'll need investment growth even beyond your hoped-for retirement?
The one thing you must never do is make investment decisions in a crisis mentality. Never sell -- or buy -- out of emotion. Don't blindly seek help, but do find trusted advisers. Almost every major mutual fund company (Fidelity, Vanguard, T. Rowe Price) now offers investment diversification services to their clients. Or go to www .TerrySavage.com and click on the box that says "Financial Engines" to get investment allocation advice from the company that serves America's largest company 40l(k) retirement plans.
You're not expected or trained to do this yourself. Some people have the interest, inclination and time to take on this project. Others retain advisers. Everyone should understand the advice being given before making a move. Some advisers specialize only in investments. But that's not enough. You must coordinate tax advice, life insurance, estate planning, health and long-term-care insurance, along with your investments. It may seem like a daunting task, but help is available.
I don't advise getting advice from the same person who got you into this mess! Your losses are partly your fault if you failed to tell your broker or adviser that you needed a conservative plan. Or if you refused to ask and understand the risks involved. But that's all history.
Make the next decision in a sensible manner. You don't want to incur more transaction costs or tax hits because you suddenly decide to make a switch. Instead, set up meetings with other advisers, and get their take on your situation. Be honest!
To start, go to either www .cfpboard.org, to search their registry of financial planners near you, or www.feeonly.org, to find financial planners that do not charge commissions on the products they sell.
Discuss their services over the phone, set up more than one interview, and take all of your financial documents. The first meeting should come at no charge and give you both an idea of whether you're well-suited. Ask for and check references!
I recognize that some people who have read this far are only thinking about a plan to survive for the next few months or years, having fallen into the abyss of job loss and/or retirement plan losses.
Let me once again recommend you call Consumer Credit Counseling, at (800) 388-2227, to be connected to the nearest local office. Just talking with their qualified and concerned advisers can help you gain your footing in these treacherous times.
If you've lost your job, health insurance will be a big issue. The COBRA provision allows you to maintain the same insurance for 18 months -- but without a job, how will you pay for it? Go to www.ehealthinsurance.com and at least purchase a lower-cost, high-deductible plan that will cover major expenses, so you don't lose your home to unpaid medical bills.
Rolling over your retirement account is another job-loss task. And it can be costly if not done correctly. Guard against the temptation to dip into that money until absolutely necessary, since you'll incur a tax bill and penalties if you're under age 59½. Make retirement withdrawals a last resort.