Become financially secure in tough times

Gloria Nye  |  11/5/2008 8:36:54 PM

News You Can Use Distributed 11/05/08

“First, don’t panic.” That’s the advice of LSU AgCenter family economist Dr. Gloria Nye regarding the current turmoil on Wall Street.

“Investments can fluctuate day-to-day, and it is important NOT to panic when the stock market drops in connection with a national crisis,” Nye said, explaining that after the 9/11 attacks, for example, the Dow rebounded within 60 days.

The family economist noted that fewer than 3 percent of homeowners with mortgages are in foreclosure, and most of those in foreclosure are homeowners with subprime mortgages. In other words, 97 percent of homeowners are not facing foreclosure. In addition, the 6 percent U.S. unemployment rate is not nearly as dire as the 25 percent unemployment rate in the 1930s.

“Regardless of what shape your bank is in, if your deposits are within FDIC insured limits, your savings are safe,” Nye said.

The family economist compiled a list of recommendations to achieve financial security in tough times.

– Spend less than you earn and avoid debt. Signs of debt are: you’d have an immediate financial crisis if you lost your job; you spend more than you earn; you must borrow to pay current bills; you pay for everyday expenses, like groceries, with savings or credit; you pay the minimum or less on your bills each month; you are being contacted by bill collectors; you’re having problems in your relationships because of money.

– Plan ahead. Calculate the savings required to achieve future financial goals like home ownership or retirement, and save and invest regularly to achieve your goals. Research shows that, at every income level, people who plan are more financially successful.

– Take a series of precautionary steps: prepare a will; have an emergency fund; calculate your net worth periodically (see calculation at www.kiplinger.com/tools/networth.html); follow a spending plan or budget; write down your financial goals with target dates and dollar cost; and don’t buy more house than you can afford.

– Build and maintain your human capital. Keep your job skills current. Go back to school. Practice good health habits. Eat right and get adequate sleep and exercise.

– Make compound interest work for you. Invest early and often, particularly in tax-free or tax-deferred investments, where income tax is not owed or can be postponed. Avoid making minimum payments on credit cards.

– Save and invest regularly. Invest in stocks or mutual funds at regular intervals. Make deposits to employers’ savings plans (401Ks) to earn the maximum available match.

– Have a personal asset allocation strategy, based on your investment risk tolerance level and financial goals time frame, and stick with it. Asset allocation is how you divide your portfolio among stocks, bonds, real estate and cash assets. Know your risk tolerance level: www.rce.rutgers.edu/money/riskquiz.

– Keep your investment portfolio diversified to mitigate risk. For example, with stocks, invest in large and small, foreign and domestic companies or mutual funds that are already diversified to protect you from losses due to declines in a certain type of investment or industry sector.

– Buy low and sell high. Although it is a fundamental principle, many people panic and do the opposite during declining markets. Keep making your regular deposits regardless of the market.

– Be aware and careful. Purdue University professor Sugato Chakravarty, who studies psychological factors involved in personal finance, says the less we handle our money, the more removed we are from it and the more out-of-control it can become.

Chakravarty suggests that the more we disconnect with handling our money by using debit and credit cards, direct deposit, automatic bill pay, etc., the more risks we tend to take with our finances.

Conversely, the more we touch it and work with our money, the better we take care of it. His advice is to get intimate with your money – real hands-on – to reduce risky and costly financial behavior.

Nye also advises protecting yourself against identity theft by checking your credit record periodically. Visit www.annualcreditreport.com to obtain a free report.

For related family economics and consumer topics, click on the Family and Home link on the LSU AgCenter home page at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.

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On the Internet: LSU AgCenter: www.lsuagcenter.com
Contact: Gloria Nye at (337) 948-0561 or gnye@agcenter.lsu.edu 
Editor: Mark Claesgens at (225) 578-2939 or mclaesgens@agcenter.lsu.edu

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