Financial Consultants and Financial Planners

Managing Your Money in Tough Economic Times
Regardless of whether we're in an economic recession, one thing is clear: the economy is going through a turbulent period, and for many people finances are becoming increasingly tight. David G. Strege, CFP®, Chair of CFP Board’s Board of Directors, shares tips on managing money in tough economic times.

The first thing to do, according to Strege, is to look at all the major short-term expenditures coming up in, say, the next 12 months. Maybe you hope to purchase a new car, or you’ve planned a big vacation, or you have a child entering higher education. “Whatever expense you’re planning,” Strege says, “you need to have that money readily available — in a money market or savings account, for example — so that it is not subject to stock market volatility.”

A savings account is the safest type of investment. But because interest rates are low — in order to help spur economic growth — your rate of return (the interest the bank pays on your deposit) will be low, too. Still, a savings account is your best bet if you need to have the money available at short notice. For a potentially higher interest rate, you might consider a money market account, another type of savings account that usually requires a higher minimum balance. There may also be limits to the number of withdrawals you can make each month from a money market account.

Strege also suggests that your emergency fund — money to be used in case of unforeseen expenses — should be kept in the same type of accounts: “Keeping an emergency fund in a money market or savings account means that if something unexpected happens, like job loss or illness, you’ll have three to six months worth of expenses to see you through.” For more on emergency funds, and how to start saving for one, check out “In Case of Emergency ... Use This Fund!” in the September 2007 issue of It’s Your Turn.

Next, Strege advises, take a look at longer-term expenditures, spending that may be one to three years away. “What’s coming up?” Strege asks. “What planned expenditures do you expect over the next one to three years? Maybe you want to make a down payment on a house, or you have a child who will be starting college. This money should be in short-term investments, like certificates of deposit (CDs) or bonds, which are not subject to market risk.”

In a CD, you deposit a specific amount of money for a fixed period, anywhere between three months and five years. In return, the bank offers a guaranteed rate of return over that period. The longer you leave the money in, the higher the return. There are usually penalties if you withdraw funds early, so be sure you can afford to leave the money untouched for the full term before opting for a CD. Otherwise, it may be more advantageous to leave the funds in a savings or money market account.

Bonds are essentially a way in which corporations and local, state and federal governments borrow money. The amount of the bond represents the amount of the loan, for which the corporation or branch of government pays a fixed amount of interest over a fixed period. You receive your money, plus interest, when the bond matures, though bonds can also be traded like stocks.

In the longer-term, five years or more, Strege recommends investors remember, “Stocks always have short-term drops. The worst thing to do is to have an emotional reaction to short-term market turbulence and to get out. If your investments have already lost value, it’s already too late to get out. And you can never identify an upward trend until after it has happened, so you’re likely to miss the benefits of an upward market as well.” Strege cites statistics showing that over the long term — say, 20 to 40 years — stocks have always had better returns than bonds and other types of investments. “But if you can’t emotionally withstand and understand market volatility,” he says, “you shouldn’t have much of your money in stocks.”

Finally, if you’re finding it hard to make ends meet in the current economic climate, Strege has some simple advice: “Make more or spend less. You have to do one of the two. Try relying less on credit and paying off your highest interest debts first. When you pay off credit card debt at 17% interest, you free up cash flow that can be used to build up an emergency fund or contribute to a 401(k). If you don’t want to get a second job, then decide which expenses you are going to cut — disconnect the cable service, stop going out for lunch. That may be inconvenient, but it’s a greater inconvenience to have to move out of your house” because you can’t make mortgage payments.

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