Finding an Answer
One day this summer, I returned home from errands — putting gas in the car, shopping at the supermarket, picking up dry cleaning — with a strange feeling in my stomach. It wasn’t indigestion or hunger, I realized, as I tried to soothe it with the Greek yogurt that usually does the trick. It was fear. I’d just spent $89 to fill my tank and $167 to fill my grocery cart. One quick mental calculation later, I realized that if the price hikes continued, my annual budget would go up by $2,500. And what if it got worse?
As a financial expert and coach, I often travel the country talking to large groups of people — sometimes bankers or dentists, sometimes all women — and I’ve heard the same anxiety and the same questions, even from the folks with the largest paychecks: What does this economy mean for me? How do I protect myself from a downturn that just isn’t ending?
Many people are already making sacrifices. The AARP surveyed people over 45 and found that 61 percent are eating out less, 47 percent have postponed travel, and 46 percent have put off a major purchase. And a surprising 27 percent say they’ll retire later than they originally planned.
It’s women in their 40s who are feeling the squeeze, even more than those in their 50s and 60s, according to the same study. Credit that to a triple whammy. A 65-year-old retiree has probably paid off her house and her kids’ college. A 47-year-old, on the other hand, may be socking it away for college, retirement for herself, and healthcare for her parents — all at the very same time.
What’s the answer?
Although we can’t control the stock market, interest rates, or commodities prices, there is still a lot about our finances that is within our power — and exercising that power can make us all feel much better. Here’s what I’m doing; feel free to join me.
Smart Money Tips
Don’t sweat the house if you’re not moving.Nationally, house prices have fallen 6 percent or so in the past year, according to the National Association of Realtors. While that’s painful to hear, for most people the numbers are meaningless. Unless you need to relocate, you don’t have to sell your house. And if you do, you may very well end up with a profit, as long as you price it to sell. Meantime, if you’re sitting with an adjustable-rate mortgage that has just reset, chances are you’re pocketing extra cash each month. Just don’t expect the gravy train to go on forever. The way interest rates are moving, the next adjustment will be up. My advice: Bank the difference between the payments, and add it to your slush fund.
Double your just-in-case emergency cushion.Most financial experts advise keeping an emergency cash stash (in a money market account) equal to three months’ expenses, in case you lose a job or the roof springs a leak. Bill Gustafson, director of the Center for Financial Responsibility at Texas Tech University, advocates doubling your cushion to six months during times like these. If you’re the sole breadwinner, I suggest you consider aiming for nine.
Respect your allocation.The first quarter of 2008 was the worst in more than five years for the Dow Jones, the S&P 500 and NASDAQ. What typically happens in this situation? "Investors are not happy with their statements, so they run after what’s hot. That’s not a good thing to do," says Barbara Camaglia, president of Legacy Financial Advisors, in Beachwood, Ohio. When you established your retirement account, you came up with an asset allocation plan — a ratio of stocks to bonds to cash — that worked for you. If the reason you chose that plan still holds, then abandoning it because the markets are falling doesn’t make sense. Instead, this is your opportunity to buy stocks on the cheap.
But what if you backed your way into your asset allocation? In that case, now’s the time to think about a ratio that would really suit you. The classic formula: Subtract your age from 100, and make that number the percentage you put into stocks, with the rest split between bonds and cash.
Remember that you can work in retirement.When our parents retired, they played golf, traveled, and — not counting social security and their pensions — didn’t bring in a dime. That won’t be the case for most of us. According to one recent survey, 63 percent of us expect to work for pay during our retirement. If there’s any silver lining to this scenario, it’s that continuing to work will stretch the money you’re saving now.
Attach numbers to your retirement dream.The key is to know what sort of retirement you’d like: Will it involve moving to a new part of the country? Starting a business? Will you have a mortgage? Still be paying college bills? Once you have that vision (even if it’s likely to change), calculate what it will cost. Then play around with the Employee Benefit Research Institute’s Ballpark Estimate calculator at saveforyourfuture.org to help you figure out how much you should be putting away.
Pay more attention to the money you have.There was a period in my younger life when I was out of control financially. My credit card debt added up to six months of my salary. (Shoes were, and still are, my Prozac.) Finally I started tracking my spending, and the madness stopped — essentially overnight. (It’s amazing how you don’t need another pair of black pants when you have to cop to the purchase by writing it down.) I also opted for a tougher-to-botch approach to my retirement accounts by putting money in target date funds that are routinely rebalanced to become more conservative as my projected date of retirement approaches. I also elected automatic contribution escalation, so that I began investing more without having to remember to do it. And I started banking online, which helped because I — like just about everyone who banks online — now look at my money four times as often as I did before.
And you know what happened? My stomach stopped churning. When you control your money, you control your life. Sure, financial fear still strikes at night every once in a while. But these days, my rational self knows I’m doing what I have to do to keep the true emergencies at bay.
Originally published in MORE magazine, October 2008. Read more of More's personal finance expert Jean Chatzky's advice here .