Magazine Personal Finance
The year 2008 was a perfect storm in the U.S. economy. Anything that could go wrong did. The world saw the results of years of bad habits that were allowed to continue unabated. We continued to consume more than we produced and to spend more than we saved, contributing to what President-elect Barack Obama describes as “the worst economy in our lifetime.” More than a million jobs were lost; unemployment rates have risen to record heights; venerable Wall Street banks have closed or begged for taxpayer dollars to keep operating; more than 12 million people owe more on their homes than what their home is worth; and we still have a $10 billion-per-month war that is draining our resources.
Calm can come in 2009 for individuals who are adequately informed and who exercise true fiscal responsibility. If small investors had been sufficiently educated about the right time to invest in stocks, they could have avoided being hurt in 2002 by the collapse of dot.com companies or by the bankruptcy of their employers. Many employees of the now defunct Enron Corp., for example, lost most of their retirement savings because they were heavily invested in Enron stock through their 401(k) plans at the time the company went bankrupt.
As for predatory lending — trigger of the subprime mortgage market’s implosion and subsequent meltdown of the global financial industry — the best defense is educated consumers. While we have limited control of the actions of the government and even less control of those of the private sector, we have complete control of what we learn and apply in our lives. Therein lies the solution to our economic success as individuals: knowledge and the application of that knowledge.
For a calmer 2009, investors must go back to basics. A good investment plan comprises all the necessary to sustain itself over the long term. It should include the following:
Adequate insurance coverage
Risk management is key to sustaining an investment strategy. A child should not have to forgo college should something happen to one of its parents. Purchasing the right amount of life insurance should not be taken lightly. Predatory insurance practices are more prevalent than predatory lending in other areas. Learn about the products you are purchasing before you see your agent.
The number one cause of bankruptcy is medical bills, hence the need for adequate health insurance. Disability insurance could be an option, but do not be guided by the agent’s desire to make a commission. Know what your values are and purchase products based upon what you feel is important.
Up-to-date estate planning documents.
How much money do we need to give to the government because our estate is not planned properly? Do you have a will or trust in your name that outlines how your assets are to be distributed? How about a living will, a health-care proxy, or power of attorney that will tell others how you or your finances should be handled if you lose the ability to speak for yourself? If you are married, now is the time to purchase one of those workbooks that allows you to list all of your possessions in one place. Fill it out with your spouse as a project. You can go to www.crownfinancialministries.org, and purchase a great book called Set Your House in Order for as little as $17.
A working budget.
Sixty percent of this country is spending more money than they earn every month. Purchase budgeting software from Quicken or create your own document. Create a spending journal in which you write down all of your personal expenditures over a period of 30 days in order to get an accurate record of your spending habits. The budget is the most important component of the financial plan and should not be overlooked. Make 2009 the year you tame excessive consumption.
This does not mean you must be a miser, but is it necessary to participate in every sale that you see. Sales are created to generate volume revenues for the vendor, so it is okay if you miss one. There will always be another one. Never shop for food if you are hungry because you will end up purchasing too much. Never shop for clothes if you are bored or otherwise emotionally vulnerable because you will begin to form a habit of shopping whenever you are in that state.
Increase your FICO score.
Is your FICO score (named after the Fair Isaac Corp.’s measure of credit risk) 750 or higher? To find out, you can obtain a free credit report at www.annualcreditreport.com. Set up a system of where you are sure to pay your bills on time. Pay down your debts, steer clear of bankruptcy, keep your line of credit large, keep your consumer credit cards small and be patient.
Eliminate credit card debt.
Credit-card debt is extremely dangerous. Make 2009 the year that you eliminate all of your credit-card debt. The only two reasons that you should use your credit cards are for emergencies and to establish your credit history. The two most popular credit cards for millionaires, according to The Millionaire Next Door (Pocket, 1998), are Visa and MasterCard.
Company retirement plan.
If your company offers a 401(k), 403(b), 457, or any other type of retirement plan, make certain that you are invested in it. I have never heard a retiree complain of having invested too much in his or her company’s retirement plan. However, I have heard many people complain about not investing more money and not starting to invest earlier in their company’s retirement plan. Make sure that you have the asset allocation that fits your risk-tolerance level. The younger you are, the more you can afford to invest in stocks. The older and closer to retirement you are, the more your portfolio should be weighted in fixed income. Talk to an adviser about the best asset allocation for you.
Too many people try to invest in the market but refuse to invest in their “rainy day” fund. If you loose your job, the last thing that you want to do is sell stock just to have some pocket money. In 2009, make it a goal to save three to six months’ worth of living expenses in a high-yield savings account.
Examples of accounts with high rates of interest can be found at ingdirect.com, emmigrantdirect.com, or oneunited.com. These Internet banks usually have higher interest rates because they are online and have lower overheard. Just like the larger banks, they are FDIC insured up to $250,000, have no fees, no minimums and you can usually have access to your funds directly to your checking account in 1-3 business days.
Ready to invest.
Once you have gotten rid of your credit card debt and have stored away your emergency fund, you should be ready to invest. Why “should?” If you have a major purchase to make—such as buying a home in the next three years—or if you can foresee a need for the money you are planning to invest in less than five years, you should not invest that money into the stock market.
If you plan to invest in a house, before doing so you should get opinions from the following sources:
A mortgage professional. Choose a mortgage lender with whom you are comfortable working and who seems to be trustworthy.
An unbiased party. This could be a knowledgeable friend or a financial advisor who has no conflicting interest. While it is good to have a professional opinion from a qualified mortgage lender, these professionals often have the conflicting interest of trying to earn a commission. The larger the loan you obtain, the larger the commission they earn. This act of predatory lending has caused many to take out home loans they could not afford over the long term.
Your own research.
The days of going to a financial professional without first researching the various savings and wealth-generating products on the market are over. If I know that I will be arrested if I am caught stealing a car, does that knowledge make me a lawyer? No. It simply means that I have a basic knowledge of the law that could keep me out of trouble.
The same applies to our finances.
If you are plan to invest in the stock market, take your time and do the necessary research. I firmly believe that the market will recover from the current downturn, as it has always done in the past.
ranted, today’s recession may last a little longer because the investments that have depreciated in this market are combined with debt, which has an adverse impact all around. Unlike today’s, the recession that began in 2000 did not inhibit banks from lending capital. Because banks are not lending, we may have to endure pain for a little longer than was the case in 2000.
Ryan Mack is the president of Optimum Capital Management L.L.C.