Perspective After Tragedy: Twenty Post 9-11 Financial New Year’s Resolutions
The past year has provided extraordinary challenges and opportunities for many U.S. citizens as consumers, investors, employees, and heads of households. Now that several months have passed since the tragic events of September 11, 2001, we can look back with a better sense of perspective. Below are twenty post 9-11 suggestions to improve your finances in 2002:
Invest Regularly, Regardless of Market Conditions--We know from history that financial markets eventually rebound and some of the biggest gains follow the largest losses. For example, four days after the December 7, 1941 attack on Pearl Harbor, the Dow Jones Industrial Average (stock market index) dropped by 6.5%, but, 22 days later, it was up almost 4%. Similarly, it also took only 19 trading days after September 11 for the Standard & Poor's 500 stock index to return to its September 10 level.
Buy Stocks For Long-Term Financial Goals--According to the Chicago investment research firm, Ibbotson Associates, large company stocks, as represented by the Standard & Poor's 500 index, had a compound annual return of 11% from 1925 to 2000. By comparison, other asset class returns were 5.3% for long-term government bonds, and 3.8% for Treasury bills, which are a proxy for cash assets.
Develop an "Investor's Mindset"--You can't invest money, particularly in stocks, with a "CD mentality." In other words, investors must be prepared to lose principal sometimes or to see a loss or reduction in earnings. Investments are inherently volatile and unpredictable in the short-term. That is why stocks are generally not recommended for financial goals that are less than five years ahead. There may not be time for the market to recover before you need your money.
Don't Panic and Sell--A "paper loss," such as a declining mutual fund account balance on quarterly statements, is a temporary thing. An account's value will continue to change with market conditions. If you panic and sell all your stock during a market downturn, however, you've lost real money, plus the opportunity to reap the market's superior long-term performance. Psychologists use the term "saliency" to refer to how the human brain reacts to traumatic events. Research shows that, the more traumatic and more recent an event, the greater the human brain assumes its probability of recurring, regardless of the actual probability of a similar event.
Rebalance Your Portfolio--During the late 1990s, investors probably had to sell stock to maintain their original asset allocation percentages. That's because rising stock prices over-weighted this asset class. They may have started out with 50% of their portfolio in stocks and ended up with 60% or more as stock prices rose. In a declining market, however, portfolio rebalancing works in just the reverse. Investors may need to buy more stock to keep the equity portion of their portfolio at its previous level.
Dollar-Cost Average Investment Purchases--If investments are made regularly on an automated basis (e.g., bi-weekly 401(k) or 403(b) plan payroll deposits), shares are bought during good times and bad. Otherwise, many people would not have the courage to invest during market downturns and would forego the opportunity to buy shares at a reduced cost. It has been said that the stock market is the only "retailer" where, when its product is on sale, consumers run out of the store. Dollar-cost averaging keeps people on track with a system to invest a regular amount (e.g., $50) at a regular time interval (e.g., monthly).
Take Care of Your Dependents--The events of September 11 showed us very clearly that life is precious and can be cut short tragically and unexpectedly. Young household heads can die just as easily as senior citizens and many families lost a significant source of income in their households. Don't make things worse for your survivors in case tragedy strikes. Prepare a will and living will and purchase adequate life and disability insurance.
Decrease Debt--Income interruptions due to unemployment and other causes are bad enough but hurt much worse when household consumer debt payments exceed 15% to 20% of take-home (net) pay and consumer debt, plus housing costs (rent or mortgage), exceed 40% to 50% of net pay. These debt ratios are commonly cited as evidence of financial difficulty.
Take Advantage of Attractive Buying Opportunities--Retailers are enticing consumers to spend these days with reduced prices and other incentives (e.g., zero percent financing). These messages to spend to stimulate the economy are in direct conflict with the inclination to save for an uncertain future. What should consumers do: spend or save? The answer is "it depends." If you're living "on the edge" with few emergency reserves in the event of unemployment, use discretionary funds to shore up savings and reduce debt. If your finances are in good shape and you need a product or service, now may be an excellent time to buy it. Inquire about available discounts and follow the "Rule of Three" by comparing at least three competing products or services.
Check Your Financial Fitness--A byproduct of seeing so many innocent lives lost, as well as the recent downturn in financial markets, is that some people are assessing their lives, their expectations, and where they stand financially, sometimes for the first time. Increased interest by consumers in purchasing life insurance and preparing wills has been widely reported. A helpful progress indicator is the Rutgers Cooperative Extension Financial Fitness Quiz, available online at www.rce.rutgers.edu/money/ffquiz.
Save More Tax-Deferred--In 2002, higher contribution limits go into effect for tax-deferred employer retirement plans and IRAs, as well as additional catch-up savings amounts for persons age 50 and over. The maximum contribution limit for IRAs is $3,000 per year for the next three years. Tax-deferred retirement plan contributions increase to $11,000 in 2002, with an additional $1,000 a year until a maximum of $15,000 is reached in 2006. In 2002, older workers can contribute $3,500 to an IRA and $12,000 to a 401(k), 403(b), or 457 deferred compensation plan.
Believe In and Plan For the Future--Living about 60 miles from both Ground Zero and the Trenton mail processing facility, when the plane crashes and anthrax incidents took place last fall, I heard some people voice uncertainty about whether it was "worth it" to continue saving for an unknown future. Some talked, half in earnest, about going on a final, last-ditch spending spree. Conscious, strategic planning, not wild spending, is the appropriate response to financial uncertainty. This is especially true in light of stories about how many terrorism victims had high debt loads and lacked wills, adequate life insurance, and/or a second household earner's income.
Develop a Spending Plan--Track your expenses for a month to analyze spending habits. Then develop a plan where income equals expenses plus savings. A Spending Plan Worksheet can be found on the Web site www.rce.rutgers.edu/money2000.
Reduce Household Expenses--Everyone's expenses and values differ so use strategies that work for you. Some things that I've done recently to reduce expenses are to refinance my house (again) with a home equity loan from a local bank (application fee: $35), switch cell phone plans, use my cell phone for long distance calls, and discontinue unnecessary premium satellite dish channels.
Save Loose Change--Did you get one of those big popcorn tins for Christmas? Resolve to fill it with coins by year end. Start by saving a dollar a day, plus pocket change. Follow this strategy and you should have about $50 of savings per month.
Inventory Your Possessions--The 2000 floods in Sparta taught all of us the importance of being able to document the value of lost or damaged possessions. Did you get a camcorder or digital camera as a holiday gift? Use them to take videos or photographs of major household possessions and store the "evidence" away from home.
Check Your Credit Report--A Credit File Request Form can be found on the MONEY 2000 Web site listed above. By law, New Jersey residents are entitled to one free credit report per year from each of the major credit reporting agencies (Experian, Trans Union, and Equifax). While you're at it, you can also check out your credit score for free from the Web site www.eloan.com.
Ditch Low-Rate Savings Accounts--The Consumer Federation of America reported in 2000 that Americans lose $30 to $50 billion in forgone interest each year by keeping their savings in low-rate savings accounts. Interest rates are even lower today. Some higher-paying alternatives are money market mutual funds, Treasury bills and notes, and Series EE and I bonds, which currently pay 4.07% and 4.40%, respectively, through April 30, 2002.
Review Your Tax Withholding--If your tax refund (or tax bill) is more than $500, file a new W-4 form with your employer to better match tax withholding with household income. Use the worksheet on this form to calculate the number of withholding allowances that your family is entitled to. This is especially important for dual-income households and people with self-employment income or more than one job.
Be Prepared--We've all heard the word "uncertainty" used a lot lately to describe the stock market, the economy, or life in general. Life has always been uncertain, however. This is nothing new. What has changed is our awareness of uncertainty on many fronts: about the stock market, about keeping a job, and even about life itself. We feel more uncertain so the world seems more uncertain. Financial preparedness, such as having organized financial records, emergency savings, and adequate life insurance, is a great antidote for uncertainty. September 11 was a wake-up call for many people in many areas of their lives, including finances. This year, more than ever, is the time to keep those new year's resolutions.