What a month it has been! Between a tightening credit market, various
banks failing on a regular basis, housing market dive, high gas and
food prices, and a wildly volatile stock market, it's no wonder that
it's tough to turn on the news each morning.
It is rough out there, but try not to panic. As much as the news media would like you to believe it, the world is not coming to an end any time soon. The good news is, there is plenty that you can do to put yourself in the best position possible to safely ride the crazy roller coaster that is currently our economy!
Here are my tips for you. Please feel free to ask me questions about anything you don't understand right now - I'll be happy to help you sift through the confusion.
1. Don't panic
It's easy to imagine total catastrophe when so much of the economy is in flux. However, it is so important to not become reactionary. I have heard more than a few friends wonder these past few weeks whether the best thing to do is to just pull all your remaining money out of everywhere and hide it under your mattress (and then climb into bed on top of it and not emerge until the scary times have passed!).
I urge you to be brave. I'm sure you have heard the old adage "buy low, sell high." Well, guess what? Right now, we are at a "low" point and this is the exact opposite of the best time to sell. The best thing you can do right now is to invest in a strong seat belt, buckle up, and hang on!
If you are a client of mine, you know that we always talk about how it is much better to be "in the market when it goes down" than "out of the market when it goes up."
One thing you can do with your investments is rebalance your portfolio, if necessary. You may have the intention of keeping, for example, 80% of your portfolio in stocks and 20% in bonds. With the market fluctuations, your portfolio may now have decreased to, for example, 60% in stocks and 40% in bonds. Just as you would when the market has been strong and certain parts of your portfolio have outgrown their intended proportions, you should readjust the percentages of your portfolio if certain parts have decreased in size faster than other parts of your portfolio. If your intention has always been to keep 80% of your portfolio in stocks, you should make sure that your portfolio is still in line with your intentions. (Resist the urge to change your target percentages or become more conservative as a reaction to current events!)
2. Protect your credit rating
You may have heard (and I'm not sure how you could not have heard, unless you have sworn off all major news networks!) that a huge part of this economic turmoil is closely tied to the credit markets. There is a lot of information and mis-information floating around out there right now about the credit markets. The simple truth is, the credit markets are tightening, meaning it is going to get much more difficult to obtain loans, mortgages, credit cards, etc. The large bailout package passed by congress should help a little to loosen the credit markets, but they may continue to be tight for a while - only time will tell.
At this point, I would highly advise you to fiercely protect your credit rating - no matter what it takes. Work hard to not miss any payments on anything - your cell phone, your credit cards, your mortgage, etc. If it means working a bit of overtime or getting a weekend job in order to start paying off some of your debts, in order to ensure that you will comfortably be able to make all your payments on time, it makes sense to do so at this point.
3. Live more frugally and save more
Even if you haven't started feeling the pinch personally, you should begin trying to live more within your means than you previously were. We are coming off a period of excessive spending, so it's likely we can each tighten our belts somewhere, even if it seems difficult. Pay off your debts, trim your luxury expenses: cable TV and internet packages, cell phone plans, going out to eat for dinner, vacations, start bringing your lunch to work. As you pay off your debts, sock away what you were previously paying toward your credit cards and luxuries into a high-yield savings account in order to create a good sized emergency fund. For years, your financial advisor and personal finance magazines have been telling you to create an emergency fund. The emergency times are now upon us, so as much as you can boost that fund in the near term will help you - aim for 6 months to a year worth of cash to cover essential expenses. If things start getting really rocky, you don't want to be living "paycheck to paycheck." I realize this is a very difficult thing to do when you feel like your back is already up against the wall, but it will be so worth it - even if you can just start saving a few dollars here and there, it can really help you if things start to get more difficult.
Remember, when I say "live frugally" and "save more" that does not mean withdraw money from your investments or your 401(k). Rather, I would argue that now is a great time to be investing in a well diversified, consistent manner. The stock market is now "on sale" - if you love finding great bargains on high quality items when shopping, now is the time to look to the markets for the same experience.
4. Review your personal insurance policies
You may feel that you have very little control over anything right now, and that can be frustrating. One great way to make a real difference in your personal financial life is to review your various personal insurance policies. The point of insurance is to help us survive in times of personal catastrophe. While you are working to save and set money aside into an emergency fund, another huge safeguard would be to prepare for the unexpected. Life insurance, disability insurance, homeowners, renters, auto, health and umbrella liability policies are all worth reviewing at this time. Having a great set of insurance policies really helps to minimize your risk in many ways when your whole financial life feels very volatile.
We have all witnessed the failures and rescue packages of huge financial and insurance powerhouses (such as insurance giant, AIG) over the past few months, so you might be wary to keep all of your insurance policies with one large company. I would not discourage you from diversifying your risk a bit in this sense. With the government's heavy hand in the economy these days, it is unlikely that a large insurance company would fail to the point that you would be completely uninsured, but none of us can tell the future. Diversifying across firms is a good idea here for another reason as well. Even though it might be convenient to deal with just one company, you should look for great companies in each area of insurance. A really strong life insurance company may not be as specialized in disability or homeowners insurance, so you want to look for the company that stands out in each area of insurance you are looking to buy.
Speak to a non-biased financial professional who can help you determine whether you have the right amount of coverage for your particular needs in each insurance area. Great insurance coverage will go a long way toward helping you sleep at night!
5. Dollar cost average into the market
Are you familiar with the concept of dollar cost averaging? It is a fairly simple economic concept designed to help you "buy low and sell high." In order to achieve dollar cost averaging, you will spend a fixed dollar amount at regular intervals (once a month, for example) on a particular investment or your entire portfolio, regardless of the share price. In this way, you end up purchasing more shares when prices are low and buying fewer shares when prices are high, and achieving an overall lower price per share.
I bring up this concept since it is currently a great time to get into the market in a diversified manner if you aren't already. If you are already in the market, you should stay in and continue to add to your portfolio. However, with all the volatility in the market right now, it is a particularly important time to make sure you take full advantage of the market's ups and downs.
6. Make yourself indispensable at work and boost your resume; Build your personal network
I always tell my clients that the greatest asset they have as a young professional is their ability to earn an income. With all the talk of gloom and doom these days, it can be tempting to tuck into your cubical, work away quietly at your desk and avoid the bad news as much as possible. However, we all must be aware of the very real possibility of layoffs as companies come to deal with the credit crunch and volatile economy.
Now, I'm sure we can all agree that from a business perspective it's impossible to make yourself truly indispensable at work. If your employer is going through layoffs, there might be little that you can do to help your situation. However, there are always things you can do to make yourself less dispensable. Look around and figure out which projects are difficult, and more dreaded than the rest, and volunteer for them, and do an awesome job at them! Enroll in a continuing education class, either through your employer or through a local university or center for adult education, in order to boost your resume and your skill set. Don't complain if your employer doesn't want to reimburse you (the long-term benefit will far outweigh the cost of the course), but make sure that they know how much you are learning from the class and how it applies to your job. Get excited about what you are learning and spend time chatting with your managers a about what your company does. Have lunch with your manager and chat with them about your excitement when it comes to the future of the company and the new and innovative things the company has been doing recently. Show your manager that you are more interested in helping the company succeed overall than in your own daily grind in your cubicle. Do you have a family friend or relative that might be interested in hiring your company's services? Have you ever asked them? Even if your job is the farthest position away from the sales department, now is the time to bring in potential clients to your company. Remember: profit generators are always the last ones on the chopping block!
Now is also the time to step up your networking. (I can hear you groaning now!) Networking isn't as bad as it sounds. You are probably already doing it, but you might just need to get a little bit more organized. Think about all the people you know - from college, high school, your neighborhood, your job (current and past companies), and your family and friends. You might already be halfway there if you belong to a website like LinkedIn, Facebook, MySpace or Gather. Make a point to call or send out notes to people whom you have not spoken with in a while. It doesn't have to be anything fancy. Ask them how they are doing and let them know you wanted to get back in touch with them. Remind them about what you are doing professionally and ask them if they can think of any ways that you could help each other to be more successful. Offer to put people in touch with each other if there is a natural professional fit. Generating good professional Karma is always smart - if anything ever happens to your job, you will then easily be able to turn to your network and they will be more than happy to help you!
7. Make sure that your bank is FDIC insured and that you don't have more than $250,000 in savings at any one bank
Now, this seems like a ridiculous scenario, even as I type it, but I suppose it is possible, and if so, it needs to be addressed. Do you have deposits (in a checking or savings account) approaching $250,000 in any one bank? If you answered "yes", my first question is: why? Why do you have so much cash sitting in a checking or savings account? Unless you are a super millionaire and six months of your monthly essential expenses equal close to $250,000 (in which case, I must say, congratulations, you have a pretty sweet life!), you should not have this much money sitting in cash. (In some areas of the country, this would be the equivalent action of having an entire house sitting in your checking or savings account!) You should diversify your assets. You should set aside an appropriate emergency fund and invest the rest into several different asset classes (including, yes, dollar cost averaging into the stock market). This is the best way to weather the rocky economy.
In order to make sure that your deposits are FDIC insured, you can do a couple of quick checks. First, ask your bank. Most banks in the United States are FDIC insured. The bank probably has a sign in the window, on the wall and on it's website indicating that it is a member of the FDIC. For extra confirmation, visit the website called Bank Find, run by the FDIC to search for your bank.
8. Stick to your plan (or create one for the first time)
There is a reason that you have the financial plan that you have. You (and/or your financial advisor) created it specifically for you, with your specific financial goals and risk tolerance in mind. Just because the world around you is a bit rocky, that does not mean that your personality or financial goals have changed. When the economy was not quite so shaky, you determined how much risk you can handle. That hasn't changed. Now is the risky time period you were preparing for when you originally thought about your risk tolerance.
Try to take comfort in the fact that you have a plan. You are in a really good position. If you don't yet have a plan, now is the time to get one. Find a financial planner that you can trust to help you create and stick to a plan that will help you and your family reach your financial goals. Remember that you must ride out the tough times in order to take advantage of the upswings as well.
9. Consider refinancing your mortgage
If you purchased your home in the last few years and you currently have an adjustable-rate mortgage and if your credit is good enough to get a nice rate on a long-term loan, I would highly recommend refinancing to a 30 year fixed rate mortgage. Many people would argue that this does not make sense for all situations, but my stance is that it makes sense for many. Remember that a big trigger of our current economic situation was the push to put everyone into mortgages that they might not be able to afford by using creative financing techniques.
Most people that buy into adjustable rate mortgages do so with the thought that they should only be in that home for a few years, and that they plan to sell their home before the rate adjustments begin (often after 5 years or 7 years). This plan can often save you some cash during those first few years that you own your home, however, make sure that you are taking all factors into account. What if the housing market is in a similar situation that it is in today on the day that you hope to sell your home? Would you be willing to sell at a significant loss, if necessary? Would you consider renting out your home at that point if you had to move? You might argue that you could refinance your mortgage to a longer-term loan at that point. Will you feel the same way if mortgage rates are significantly higher than they are today? With the extreme volatility in the housing and credit markets, and knowing that none of us have a crystal ball, my moderately conservative recommendation for you is to refinance to a long-term loan at this point if you can do so. This will help you to be able to sleep better at night as the economy fluctuates and settles over the next few years.
10. Believe in the strength of our economy
I know that this concept has become a political talking point over the past few weeks as the presidential election nears, but there is some truth to this idea. Despite what anyone, on either side, says for political gain, we should try to remember that the United States economy is resilient. Americans are adapters. Right now, we are just waiting for and working toward the next big idea that will help our economy to bounce back - Will it be green and alternative energy? Will the digital revolution take us to the next level? Will organic living take hold? Most likely, it will be something else that we aren't even imagining yet. Don't despair as you notice layoffs and a volatile stock market (although, I realize that in the near-term that is easier said than done!). Know that we are going to all be okay, because we are not a country that gives up when times get tough. Things might look a bit hairy at the moment, but I, for one, am excited to see what we come up with next!
Let me know what tips you have come up with to help us all survive this crisis - I look forward to hearing them!
It is rough out there, but try not to panic. As much as the news media would like you to believe it, the world is not coming to an end any time soon. The good news is, there is plenty that you can do to put yourself in the best position possible to safely ride the crazy roller coaster that is currently our economy!
Here are my tips for you. Please feel free to ask me questions about anything you don't understand right now - I'll be happy to help you sift through the confusion.
1. Don't panic
It's easy to imagine total catastrophe when so much of the economy is in flux. However, it is so important to not become reactionary. I have heard more than a few friends wonder these past few weeks whether the best thing to do is to just pull all your remaining money out of everywhere and hide it under your mattress (and then climb into bed on top of it and not emerge until the scary times have passed!).
I urge you to be brave. I'm sure you have heard the old adage "buy low, sell high." Well, guess what? Right now, we are at a "low" point and this is the exact opposite of the best time to sell. The best thing you can do right now is to invest in a strong seat belt, buckle up, and hang on!
If you are a client of mine, you know that we always talk about how it is much better to be "in the market when it goes down" than "out of the market when it goes up."
One thing you can do with your investments is rebalance your portfolio, if necessary. You may have the intention of keeping, for example, 80% of your portfolio in stocks and 20% in bonds. With the market fluctuations, your portfolio may now have decreased to, for example, 60% in stocks and 40% in bonds. Just as you would when the market has been strong and certain parts of your portfolio have outgrown their intended proportions, you should readjust the percentages of your portfolio if certain parts have decreased in size faster than other parts of your portfolio. If your intention has always been to keep 80% of your portfolio in stocks, you should make sure that your portfolio is still in line with your intentions. (Resist the urge to change your target percentages or become more conservative as a reaction to current events!)
2. Protect your credit rating
You may have heard (and I'm not sure how you could not have heard, unless you have sworn off all major news networks!) that a huge part of this economic turmoil is closely tied to the credit markets. There is a lot of information and mis-information floating around out there right now about the credit markets. The simple truth is, the credit markets are tightening, meaning it is going to get much more difficult to obtain loans, mortgages, credit cards, etc. The large bailout package passed by congress should help a little to loosen the credit markets, but they may continue to be tight for a while - only time will tell.
At this point, I would highly advise you to fiercely protect your credit rating - no matter what it takes. Work hard to not miss any payments on anything - your cell phone, your credit cards, your mortgage, etc. If it means working a bit of overtime or getting a weekend job in order to start paying off some of your debts, in order to ensure that you will comfortably be able to make all your payments on time, it makes sense to do so at this point.
3. Live more frugally and save more
Even if you haven't started feeling the pinch personally, you should begin trying to live more within your means than you previously were. We are coming off a period of excessive spending, so it's likely we can each tighten our belts somewhere, even if it seems difficult. Pay off your debts, trim your luxury expenses: cable TV and internet packages, cell phone plans, going out to eat for dinner, vacations, start bringing your lunch to work. As you pay off your debts, sock away what you were previously paying toward your credit cards and luxuries into a high-yield savings account in order to create a good sized emergency fund. For years, your financial advisor and personal finance magazines have been telling you to create an emergency fund. The emergency times are now upon us, so as much as you can boost that fund in the near term will help you - aim for 6 months to a year worth of cash to cover essential expenses. If things start getting really rocky, you don't want to be living "paycheck to paycheck." I realize this is a very difficult thing to do when you feel like your back is already up against the wall, but it will be so worth it - even if you can just start saving a few dollars here and there, it can really help you if things start to get more difficult.
Remember, when I say "live frugally" and "save more" that does not mean withdraw money from your investments or your 401(k). Rather, I would argue that now is a great time to be investing in a well diversified, consistent manner. The stock market is now "on sale" - if you love finding great bargains on high quality items when shopping, now is the time to look to the markets for the same experience.
4. Review your personal insurance policies
You may feel that you have very little control over anything right now, and that can be frustrating. One great way to make a real difference in your personal financial life is to review your various personal insurance policies. The point of insurance is to help us survive in times of personal catastrophe. While you are working to save and set money aside into an emergency fund, another huge safeguard would be to prepare for the unexpected. Life insurance, disability insurance, homeowners, renters, auto, health and umbrella liability policies are all worth reviewing at this time. Having a great set of insurance policies really helps to minimize your risk in many ways when your whole financial life feels very volatile.
We have all witnessed the failures and rescue packages of huge financial and insurance powerhouses (such as insurance giant, AIG) over the past few months, so you might be wary to keep all of your insurance policies with one large company. I would not discourage you from diversifying your risk a bit in this sense. With the government's heavy hand in the economy these days, it is unlikely that a large insurance company would fail to the point that you would be completely uninsured, but none of us can tell the future. Diversifying across firms is a good idea here for another reason as well. Even though it might be convenient to deal with just one company, you should look for great companies in each area of insurance. A really strong life insurance company may not be as specialized in disability or homeowners insurance, so you want to look for the company that stands out in each area of insurance you are looking to buy.
Speak to a non-biased financial professional who can help you determine whether you have the right amount of coverage for your particular needs in each insurance area. Great insurance coverage will go a long way toward helping you sleep at night!
5. Dollar cost average into the market
Are you familiar with the concept of dollar cost averaging? It is a fairly simple economic concept designed to help you "buy low and sell high." In order to achieve dollar cost averaging, you will spend a fixed dollar amount at regular intervals (once a month, for example) on a particular investment or your entire portfolio, regardless of the share price. In this way, you end up purchasing more shares when prices are low and buying fewer shares when prices are high, and achieving an overall lower price per share.
I bring up this concept since it is currently a great time to get into the market in a diversified manner if you aren't already. If you are already in the market, you should stay in and continue to add to your portfolio. However, with all the volatility in the market right now, it is a particularly important time to make sure you take full advantage of the market's ups and downs.
6. Make yourself indispensable at work and boost your resume; Build your personal network
I always tell my clients that the greatest asset they have as a young professional is their ability to earn an income. With all the talk of gloom and doom these days, it can be tempting to tuck into your cubical, work away quietly at your desk and avoid the bad news as much as possible. However, we all must be aware of the very real possibility of layoffs as companies come to deal with the credit crunch and volatile economy.
Now, I'm sure we can all agree that from a business perspective it's impossible to make yourself truly indispensable at work. If your employer is going through layoffs, there might be little that you can do to help your situation. However, there are always things you can do to make yourself less dispensable. Look around and figure out which projects are difficult, and more dreaded than the rest, and volunteer for them, and do an awesome job at them! Enroll in a continuing education class, either through your employer or through a local university or center for adult education, in order to boost your resume and your skill set. Don't complain if your employer doesn't want to reimburse you (the long-term benefit will far outweigh the cost of the course), but make sure that they know how much you are learning from the class and how it applies to your job. Get excited about what you are learning and spend time chatting with your managers a about what your company does. Have lunch with your manager and chat with them about your excitement when it comes to the future of the company and the new and innovative things the company has been doing recently. Show your manager that you are more interested in helping the company succeed overall than in your own daily grind in your cubicle. Do you have a family friend or relative that might be interested in hiring your company's services? Have you ever asked them? Even if your job is the farthest position away from the sales department, now is the time to bring in potential clients to your company. Remember: profit generators are always the last ones on the chopping block!
Now is also the time to step up your networking. (I can hear you groaning now!) Networking isn't as bad as it sounds. You are probably already doing it, but you might just need to get a little bit more organized. Think about all the people you know - from college, high school, your neighborhood, your job (current and past companies), and your family and friends. You might already be halfway there if you belong to a website like LinkedIn, Facebook, MySpace or Gather. Make a point to call or send out notes to people whom you have not spoken with in a while. It doesn't have to be anything fancy. Ask them how they are doing and let them know you wanted to get back in touch with them. Remind them about what you are doing professionally and ask them if they can think of any ways that you could help each other to be more successful. Offer to put people in touch with each other if there is a natural professional fit. Generating good professional Karma is always smart - if anything ever happens to your job, you will then easily be able to turn to your network and they will be more than happy to help you!
7. Make sure that your bank is FDIC insured and that you don't have more than $250,000 in savings at any one bank
Now, this seems like a ridiculous scenario, even as I type it, but I suppose it is possible, and if so, it needs to be addressed. Do you have deposits (in a checking or savings account) approaching $250,000 in any one bank? If you answered "yes", my first question is: why? Why do you have so much cash sitting in a checking or savings account? Unless you are a super millionaire and six months of your monthly essential expenses equal close to $250,000 (in which case, I must say, congratulations, you have a pretty sweet life!), you should not have this much money sitting in cash. (In some areas of the country, this would be the equivalent action of having an entire house sitting in your checking or savings account!) You should diversify your assets. You should set aside an appropriate emergency fund and invest the rest into several different asset classes (including, yes, dollar cost averaging into the stock market). This is the best way to weather the rocky economy.
In order to make sure that your deposits are FDIC insured, you can do a couple of quick checks. First, ask your bank. Most banks in the United States are FDIC insured. The bank probably has a sign in the window, on the wall and on it's website indicating that it is a member of the FDIC. For extra confirmation, visit the website called Bank Find, run by the FDIC to search for your bank.
8. Stick to your plan (or create one for the first time)
There is a reason that you have the financial plan that you have. You (and/or your financial advisor) created it specifically for you, with your specific financial goals and risk tolerance in mind. Just because the world around you is a bit rocky, that does not mean that your personality or financial goals have changed. When the economy was not quite so shaky, you determined how much risk you can handle. That hasn't changed. Now is the risky time period you were preparing for when you originally thought about your risk tolerance.
Try to take comfort in the fact that you have a plan. You are in a really good position. If you don't yet have a plan, now is the time to get one. Find a financial planner that you can trust to help you create and stick to a plan that will help you and your family reach your financial goals. Remember that you must ride out the tough times in order to take advantage of the upswings as well.
9. Consider refinancing your mortgage
If you purchased your home in the last few years and you currently have an adjustable-rate mortgage and if your credit is good enough to get a nice rate on a long-term loan, I would highly recommend refinancing to a 30 year fixed rate mortgage. Many people would argue that this does not make sense for all situations, but my stance is that it makes sense for many. Remember that a big trigger of our current economic situation was the push to put everyone into mortgages that they might not be able to afford by using creative financing techniques.
Most people that buy into adjustable rate mortgages do so with the thought that they should only be in that home for a few years, and that they plan to sell their home before the rate adjustments begin (often after 5 years or 7 years). This plan can often save you some cash during those first few years that you own your home, however, make sure that you are taking all factors into account. What if the housing market is in a similar situation that it is in today on the day that you hope to sell your home? Would you be willing to sell at a significant loss, if necessary? Would you consider renting out your home at that point if you had to move? You might argue that you could refinance your mortgage to a longer-term loan at that point. Will you feel the same way if mortgage rates are significantly higher than they are today? With the extreme volatility in the housing and credit markets, and knowing that none of us have a crystal ball, my moderately conservative recommendation for you is to refinance to a long-term loan at this point if you can do so. This will help you to be able to sleep better at night as the economy fluctuates and settles over the next few years.
10. Believe in the strength of our economy
I know that this concept has become a political talking point over the past few weeks as the presidential election nears, but there is some truth to this idea. Despite what anyone, on either side, says for political gain, we should try to remember that the United States economy is resilient. Americans are adapters. Right now, we are just waiting for and working toward the next big idea that will help our economy to bounce back - Will it be green and alternative energy? Will the digital revolution take us to the next level? Will organic living take hold? Most likely, it will be something else that we aren't even imagining yet. Don't despair as you notice layoffs and a volatile stock market (although, I realize that in the near-term that is easier said than done!). Know that we are going to all be okay, because we are not a country that gives up when times get tough. Things might look a bit hairy at the moment, but I, for one, am excited to see what we come up with next!
Let me know what tips you have come up with to help us all survive this crisis - I look forward to hearing them!
I agree with your summary and want to add that number 6 is a great strategy not only when you are in "survival" mode, but all of the time. It's a great idea to be visible, take on tough projects and be seen as someone who will go the extra mile and as someone who cares.
Hi, Lisa:
Your posts are very timely and helpful. As a sister Simmons blogger, I wanted to let you know about something I happened to find online. At the National Association of Women Writers (/naww.org/blog), there's info about a series of financial advising phone calls that took place. It seems to be over, but you might like to know about it and the participants. Members of the NAWW might be interested in the advice you provided here.
Hope this helps. I hope you'll check out my blog on this Simmons site if you get a chance, and let me know what you think.
Sincerely,
- Lynette Benton