This year, 2009, will be different. We’re in the midst of the Great Recession. The usual New Year’s money resolutions, like putting your expenses on a diet, paying off debt, and fattening up your savings, are not as important as preparing for what could be another financially challenging year.
Here are nine resolutions for 2009 that will prepare you for the prosperity that always follows tough economic times.
1. Keep two years’ worth of cash needs in safe securities.
The problems in the investment markets have been so pervasive that even some previously safe investments have become risky. You should keep money that you expect to need within the next two years in investments that are both safe and easily accessible, like money market funds and bank deposit accounts. Reasons why you may need to set money aside include:
* Cash needs that can’t be paid for out of your job income, such as college tuition, home improvements, a car, or another big-ticket item.
* Even if you don’t foresee any cash needs, it’s often helpful to have at least a few months’ living expenses tucked safely away. Without fail, unanticipated costs inevitably arise, particularly when the economy reeks.
* To gradually invest a substantial amount of money. Perhaps you or your investment adviser has already moved a lot of money out of stocks, bonds, and mutual funds and into the proverbial “sidelines.” Despite your understandable distaste for “risky” investments, you will eventually want to gradually get back in the game. (See No. 3 below.) In the meantime, you want your sideline money to be safe and accessible.
* If you’re retired, you might also want to keep enough of your retirement investments in safe securities to fund up to two years’ worth of living expenses. This will prevent you from having to sell other investments at a loss in a down market.
2. Shop for the best interest rates on temporary investments.
Safe investments are pretty straightforward. The price you pay for safety and liquidity is a lower rate of interest than bonds and other longer-term investments. While safe investments hardly offer breathtaking returns, you might as well earn as much as you can on them. With a little bit of effort, you can make the most of these otherwise mundane investments. Here are some suggestions:
* Shop for a CD. First, compare rates among banks in town. Then find out what you can earn from a bank outside your hometown. Several Web sites, such as Bankrate.com, list the highest yielding CDs in the country. As long as the issuing bank is FDIC-insured (or, if offered by a credit union, is backed by National Credit Union Administration insurance), you really shouldn’t care where your CD comes from (unless you prefer to stick with a local institution).
* Compare yields on money market funds. If you have an account with a mutual fund or a broker who’s offering several different kinds of money market funds, compare the yields to make sure the one you select offers the best after-tax return (as long as you’re comfortable that the money fund meets your safety requirements). For example, a tax-exempt money market fund may pay less interest than a taxable money market fund. But after taxes are paid on the taxable money market fund, you may have more money left over with the tax-exempt money fund. This will require you to periodically compare the returns among various money market funds. If you can improve your return by periodically switching among money market funds, it’s more money in your pocket.
3. Add gradually to your stock holdings.
The stock market suffered its worst single-year loss since the 1930s in 2008, but history has shown us time and again that stocks will more than recoup their losses. The initial rebound usually occurs very quickly, catching wary investors by surprise.
If you sold off stocks during the 2008 meltdown, one of your 2009 financial resolutions should be to very gradually reinvest in stocks so that you can take advantage of the gains when the stock market turns around. Of course, no one knows when that will happen, although many are eager to offer an opinion. (See No. 9 below.) For starters, you might choose to move 2 percent of your investment money back into stocks each month.
4. Avoid traps in your workplace retirement plan.
While most employees don’t realize it, the vast majority of 401(k) and 403(b) plans offer primarily stock mutual fund choices. It’s not unusual for 80 percent or more of the choices to be stock funds. Many plan participants spread their money among a variety of funds in the plan, thinking they’re well-diversified. But in the end, they wind up with far too much money invested in stocks. As a result, employees report that they have lost as much as half or more of their workplace retirement-plan money as a result of 2008′s stock market meltdown.
To avoid this trap, pay more attention to how your money is allocated between stock and interest-earning (bond, money market, and stable value) fund choices, rather than simply putting money blindly into a bunch of stock funds that could result in further big losses if the stock market continues to stumble.
5. Review how your mutual funds fared in 2008.
Resolve to review how your mutual funds performed in 2008. Some of the best all-time mutual funds stumbled horribly during the stock market crash. If you have a mutual fund whose performance is deteriorating compared with the average for its peer group (for example, your small company stock fund is badly underperforming compared to the average small cap fund), replace it with a better performer.
One easy way to find out how your funds are performing in comparison with their peers is to go to www.reuters.com. Click on “Markets” on the left column, then click on “Funds” on the left column. You can also use the site to identify solid funds to replace any weaklings.
6. Keep contributing to your retirement savings plans.
Resist the temptation to reduce the amount of money you’re contributing to retirement savings plans. While cutting back on your contributions may seem to make sense, you’re also foregoing current and future tax benefits. If you worry that the money you add will lose value, put it into something that won’t lose value, such as a money market fund or stable value fund.
Adding to mutual funds and stocks when the market is down is arguably better than doing so when the market is rising, because you’re benefiting from “dollar-cost averaging.” Dollar-cost averaging is the process of investing a fixed amount of money on a regular basis. The trick is to stick with your schedule, regardless of whether stock or mutual fund prices go up or down. Because you’re investing a fixed amount at fixed intervals, your dollars will buy fewer shares when stock or mutual fund share prices are high and more shares when they are low. As a result, the average purchase price is lower than the average market price over the same time frame. In plain English, you’re buying more shares when prices are low. You can’t beat that.
7. Don’t dwell on short-term moves in the investment markets.
Stock and real estate prices have declined. Interest rates on some securities have declined, and in some instances to record-low levels. At one point in late 2008, a $10,000 investment in three-month U.S. Treasury bills would have earned just 25 cents interest. Rates on other securities have risen, depressing bond prices. If you change your investments in reaction to such concerns, you’re asking for mediocre investment performance.
Rather than worrying about where your investments will be in 10 minutes, 10 days, or even 10 months from now, focus on how they are likely to fare 10 and 20 years from now. Nothing good can come from obsessing over what happened to your stocks yesterday or what will happen to them next week. Take a long-term view instead because most of the money you have probably won’t be needed for a long time. Your health and your wealth will both benefit.
8. Get help if your financial situation is precarious.
It is very easy to fall into debt problems, and not just from overspending and overborrowing. When the economy weakens, individuals and families who were coping with their loans in good times now find themselves having trouble meeting their obligations. The current credit crisis is unlike anything that we have experienced. If you find that you’re experiencing problems in paying your bills or anticipate this may be the case in the near future, you may be able to take steps to keep anxious creditors at bay, get your debts under control, and keep overdue bills from having an adverse effect on your life or your credit rating.
If you will not be able to meet any loan payment, including your credit cards, act before the actual delinquency occurs, if at all possible. Explain the circumstances to the creditor. If you contact them before they contact you, they will likely believe that you intend to pay off the debt and will be more accommodating. Keep abreast of any new government programs designed to provide relief to beleaguered borrowers, particularly homeowners.
If you can’t resolve your credit card problems on your own, the next step is to consult a credit counselor. But make sure that you are dealing with a credit counselor who is affiliated with a nonprofit consumer-credit counseling service. To find a worthy credit counselor, contact the National Foundation for Credit Counseling (www.nfcc.org).
9. Don’t rely on the opinions of the pundits.
There will always be people who think they can predict the future of the investment markets, and they are particularly eager to offer their opinions at the beginning of the year. Those who do likely will want to sell you something and promote their firm. It’s impossible to predict with complete accuracy how the investment markets will fare, particularly over the near future. When the markets are bad and investors are losing a lot of money, we tend to put more credence in the opinions of the so-called experts. But if it’s so easy to predict the markets, why were these pundits so optimistic about stock market prospects a year ago?
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