October 2008
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
With the end of the year in sight, many people are hoping that 2009 will be a much better year financially than 2008. Between the high number of home foreclosures, rising unemployment, declining stock market prices and home values, bank and investment firm failures, and rising costs of basic necessities such as food and gasoline, some would argue that we haven’t been experiencing just a “perfect storm,” but, rather, a “perfect tornado.”
What should you do? Below are eight “tried and true” financial planning principles that are as appropriate during a “perfect tornado” as they are for a roaring bull market, and, perhaps, even more so:
- Spend Less Than You Earn and Avoid Excessive Debt - If household income is reduced due to unemployment or reduced investment earnings, or if household expenses continue to rise, adjust your household spending plan (budget) accordingly or prepare one for the first time. Rutgers New Jersey Agricultural Experiment Station's Cooperative Extension has several online resources to assist with budget preparation. Download the following resources:
- Be Future-Minded - Research indicates that, at every income level, people who are “planners” are more successful financially and feel better about their financial situation than those who do not plan ahead. Planning for the future includes calculating the savings required to achieve future financial goals and addressing potential future challenges such as the cost of long-term care and estate planning.
- Save and Invest Regularly - Dollar-cost average by making regular deposits to purchase stocks or mutual funds at regular time intervals (e.g., $50 a month). In declining markets, you’ll buy more shares with your fixed deposit. Also make deposits to savings plans (e.g., a 401(k) available through your employer) and rebalance your portfolio as the market changes the percentage in stocks, bonds, and other asset classes.
- Protect Against Large Financial Losses - Purchase adequate insurance to protect against potential “big dollar” losses. These include disability, liability, catastrophic medical expenses, the death of a household earner or family caregiver, and major damage to, or the total destruction of, your home.
- Reduce the Risk of Identity Theft - Request a credit report annually from each of the three major credit bureaus, Experian, Equifax, and TransUnion. See www.annualcreditreport.com. Review it carefully and look for unusual listings which may indicate that credit accounts were fraudulently opened in your name. In addition, shred documents that contain sensitive data and be careful about posting personal data online.
- Follow Recommended Financial Practices - Studies from a number of sources indicate that many people do not put into practice the action steps that are frequently recommended by financial experts. These include making a written list of financial goals with a date and a price, setting aside 3 or more months of expenses for emergencies, calculating net worth periodically, and following a spending plan or budget.
- Build Human Capital - One of the best defenses against unemployment is to be a productive worker with current job skills that are in demand by employers. Leadership skills and the ability to work well with others are also important. Another way to build human capital is to practice good health habits.
- Make Compound Interest Your Friend - Invest early and often, particularly in tax-free (e.g., municipal bonds or bond funds) or tax-deferred (e.g., IRAs) investments, where income taxes are not owed or are postponed. Avoid tapping retirement savings before retirement unless absolutely necessary.