Financially speaking, the world is changing—and fast. Here’s how it works now.
Lie #1 Call your credit card company, and it will lower your rate Over the past 15 years I have been asked many times what to do when you’re try-ing to get your credit card company to lower your interest rate. And I’ve generally answered: Phone the toll-free number on the back of your card and ask. If the customer service rep says no, get the supervisor on the line and ask again. I gave that advice frequently be-cause it worked—according to one study, more than 50 percent of the time.
Recently, however, that strategy stopped producing results. Even more disturbing, some people who made those calls let me know that while they were talking to the card companies, they learned their credit lines had been slashed or their interest rates had gone up. The Amer-ican Bankers Asso-ciation says the queries didn’t trig-ger the adjustments; consumers merely hadn’t received the notifications yet.
I did some research, and today I advise people to contact their credit card com-panies only when they are having trouble making payments and only if their credit rating is strong. In that case, the bank may be willing to lower interest rates in the short term or slash an out-standing balance. (If you do this, however, be prepared for possible long-term conse-quences, such as a lower credit limit and higher in-terest rate.) The message? To pro-tect our futures, we all need to keep abreast of the new rules.
Lie #2 It’s smart to use low interest–rate savings to pay down high interest–rate credit card debt The thinking used to be, if you take money out of a savings account that earns an anemic two percent and use it to pay off credit card debt that’s costing you 18 percent, you’re pock-eting 16 percent—and there’s no better guaranteed return on your money (except, perhaps, a 401(k) match). That basic math still holds, but the response of credit card companies has changed. Now they’re “chasing the balance,” says Credit.com president John Ulzheimer, author of You’re Nothing but a Number. It’s simple: You pay down your balance; they reduce your credit line. That hurts your credit score, since it looks as though you’ve maxed out your cards. And it raises another problem: If, down the road, you need to use your cards for an em-er-gency, the money won’t be there. That’s why now, more than ever, it’s crucial to have savings of six months (for cou-ples) to nine months (for sin-gles) of living expenses. So my advice now involves two steps: First, get that cushion safely socked away. Then start paying down high interest–rate debt.
Lie #3 Buy and hold This isn’t a lie, per se, but a dictum that people took too literally. Buy and hold is an investment philosophy that says once you purchase, say, a stock or a mutual fund, you’re in for the long term. Years, rather than months. But it never meant “Set it and forget it,” says Miami financial adviser Cathy Pareto. It also never meant “Buy and ignore,” which is, unfortunately, what many people did. They sank their money into individual stocks—often company stock they’d invested in through their 401(k)—and buck-led up for life. So the new “buy and hold” is “buy and monitor.” Follow enough financial news to know when there’s a fundamental problem with one of the stocks in your portfolio (a management change, a lawsuit), and then reevaluate the investment.
Also, following a buy and monitor strategy doesn’t excuse you from rebal-ancing your portfolio. When you in-vest initially, you should be making a deci-sion about your asset allocation: the percentage of your money that you want to have invested in stocks, bonds and other assets. As always, the movements of the mar-ket alone can be enough to throw those allocations out of whack. If the stock mar-ket races ahead, for instance, your stocks will suddenly make up a larger percentage of your portfolio (and put you at more risk than you’d intended).
To rebalance, sell some of those winning holdings and plow the money back into safer asset classes. How much work does this monitor-ing take? Not much. You likely won’t need to rebalance more than twice a year.
Lie #4 Your adviser is taking care of you You didn’t have to lose your life savings to a crooked planner to learn that nobody cares about your money more than you do. I’ll say it again: You have to be actively engaged in your money management. If you step out of the process, your future is at risk.
Lie #5 Early retirement will be a viable option Sorry, but for most people, it won’t. Americans now plan to work an addi-tional 4.2 years to make up for money they lost in the recession, according to research conducted by Ken Dychtwald at Age Wave and Harris Interactive. This will mark the first time that retirement age significantly in-creases in the United States, Dychtwald says. Almost 60 percent of the population has lost mon-ey in mutual funds, 401(k)s or the stock market in the past 12 months. (The rest weren’t invested in the stock market.) Men and women near retirement suffered the greatest losses. Americans believe it will take on average seven years for their invest-ments to be worth what they were one year ago. Bill Losey, a financial planner in Wilton, New York, says most people today should plan on retiring in their mid to late sixties or even early seventies. You’ll never know what you can afford, however, until you run some numbers. Far too few people go through this crucial exercise. Go to choosetosave.org and click on the Ballpark Estimator.
Lie #6 You can bank on a sizable inheritance You know the $41 trillion transfer of wealth that dominated the headlines a few years back, as the younger baby boomers received inheritances from their parents and the older ones passed money to their kids? Chances are, that wave of money is not going to wash over most of us. Part of the rea-son is be-cause our parents are living long-er, more active lives (trekking Machu Picchu and taking private French les-sons in Paris is expensive). And part is due to medical costs: Doctors, medication and home or residential care can eat up a fortune.
Those aren’t the only reasons you should continue to save aggressively despite the prospect of an inheritance. In actuality, according to Boston College economist John Havens, who came up with the $41 trillion figure in the first place (that was his conserva-tivees-timate), only one in five families ever passes money from one generation to another. And among those boomer fam- ilies that did receive inheritances, the average bequest was $64,000. Again:It is up to you to save for your future and teach your kids to do the same.
Lie # 7 The bad news will end when the economy recovers In fact, there is always more bad news com-ing where your finances are concerned, notes Dan Ariely, professor of behavioral economics at Duke University and author of Predictably Irrational. Think about your credit card statement. “Most everyone is surprised when they get their bill,” Ariely says. “People don’t ac-cumulate in their minds the small purchases they make over the month.” (Yet another reason to bank online! It’s extremely easy to check your outstanding balances.)
One more example: Those minor emergencies that crop up every month. We don’t plan for the dryer to break, the car to conk out or the toilet to flood, but those things do happen—sometimes all at once. And although they’re not the same as a cratering stock market or your employer filing for bankruptcy, it pays to remember that even in good times some people lose jobs, get sick or need to replace appliances. There’s nothing like aflush savings account, 760 credit score and an up-to-date résumé to tide you over. Which brings me to:
Truth #1 Preserving money is as important as chasing returns When the markets were shooting sky-ward, it’s likely you were happy to take risks. You may even have be-lieved you had a good tolerance for losing money. I did that myself, and I’ve spent many nights staring at the ceiling as a result. So? I’ve shifted more money into bonds. (I now have around 45 percent in stocks.) I’ll make up the difference in potential growth by saving extra money each month. To figure out an appropriate asset allo-cation, start by taking 100, subtract your age, and put that percent into stocks. If it helps you sleep better, sub-tract yet another five from the num-ber or—if you’re conservative like me—10.
Truth #2 Retirement isn’t as much fun as it seems Don’t let the statistics get you down. A lot of people work into their sev-enties because they love what they do and can’t imagine stopping—and others wish they hadn’t quit. “Too many people retire when what they really need is a break,” Losey notes. He surveyed hundreds of baby boomers for his book Retire in a Weekend! and found that all too often, a few months or a couple of years after re-tiring, people are bored and rest-less. A better strategy: “Talk with your employer about a more flexible work schedule or working from home before you stop entirely,” he says. It may be tougher to negotiate right now than in flusher times, but giving a little can get you a little. And it’s worth noting: A delayed retirement can be far more affordable and secure because you don’t need your money to last as long.
Truth #3 Money is like sports: there’s no defense like a good offense In good times and in bad.