Purse strings are being pulled tighter than ever as consumers brace for the ripples of the banking crisis to move to Main Street. While lawmakers warn of looming job losses and threats to retirement savings, the country’s economic climate has made understanding and controlling personal finances even more crucial as the nation weathers this period of flux.
“Right now, with this level of uncertainty, the last thing you want to do is not have financial protection,” said David Henson, founder of Wealth Management Network, L.L.C. Consumers will have to figure out how to free up money to help pay down debt or use as cushion in case of what Henson calls an “economic interruption.”
While financial gurus have long recommended the “cutting costs” remedy to help do this, Websites have been springing up to help make this effort easier. “I never met a single person who had no room to give in their budget or who I couldn’t find additional opportunities to scale back,” says Lynnette Khalfani-Cox, CEO and founder of The Money Coach L.L.C., and author of several books on personal finance. This may mean downgrading from that super premium cable package that offers 350 channels or skipping the morning double latte at Starbucks. She recommends using Lowermybills.com, which aggregates cost comparison data to help consumers find the best deals on a range of expenses including phone and insurance plans and student loans.
When it comes to priorities, Khalfani-Cox emphasizes that paying down credit card debt should be No. 2 on the to-do list, with paying the mortgage taking the top spot. “You’re used to hearing people say ‘Cash is king.’ Right now credit trumps all. Having great credit is better than having cash,” she says.
Henson disagrees. “We are in a period where the financial markets are at risk. Nobody knows how long it will last,” he says. “What you need to do is protect your ability to protect your lifestyle,” which may mean paying the minimum on a credit card balance in exchange for building up a cash reserve.
The degree to which consumers should hone in on paying credit card debt versus having an “income interruption fund” will vary by individual circumstances. While you can’t decide to do one and not do the other, for those who don’t have a cash cushion, paying the minimum on a credit card and stashing the rest of the cash may be a better bet.
“Don’t put yourself in a situation where you have to look at your 401k, IRA, or retirement savings to avoid financial hardships,” Henson says.
After major market fluctuation over the past few weeks and the merger of Wachovia and Citigroup coming on the heels of the collapse of Washington Mutual,
banking customers have been reining in deposits and retirement savings, much to the dismay of many financial experts. Khalfani-Cox says it’s a huge mistake for most people to pull money out of a retirement accounts. “Nine times out of 10 when people do that, they lock in losses and sell into a down market and they miss the upswing later when the market recovers,” she says.Still, if the risk level is so great that it causes personal uneasiness, it is OK to reevaluate your 401(k)’s asset allocation. “You don’t want to be in a situation where you can’t sleep at night,” Henson says. “At a certain point and time, people cannot stomach anymore losses. If it starts getting to that point, ratchet out exposure to the market.” For those who are five years pre-retirement, instead of completely liquidating assets, Cox recommends possibly investing more in bonds and cash.
“The problem I have is when people pull their money out and have nothing to do with it because inflation erodes the dollars purchasing value,” Cox says.
TIPS FOR SAVING, PROTECTING YOUR FUTURE
By Janell P. Hazelwood
With an economic outlook that gets gloomier by the day for the average consumer, there are still ways to safeguard your money and ultimately gain better financial habits for the future. Lynnette Khalfani-Cox, CEO and founder of The Money Coach L.L.C., a financial education and consumer advocacy company, offers tips to help you safeguard your finances and shore up savings:
Retirement Investments
Don’t panic. Diversify.
If you’re young, just get in the game. With advantages such as the employer matches and tax breaks, investing in a 401k is a good idea for saving for the future. “And you’ll have the full advantage of time and compounded interest,” she adds. Contribute what you can, even if it’s a small amount per paycheck or per month.
Seek guidance. Khalfani-Cox recommends resources such as the Financial Planning Association to find financial planners in your area.
Credit Card Debt
Avoid extra temptation. You can discontinue receiving credit card offers by calling 888-5OPT-OUT, toll free.
Be a pristine account holder and negotiator. Avoid missed payments, even on utility or cell phone bills. If you have a good history with companies, get on the phone and start negotiating. You can get interest rates adjusted or request that fees be waived. “Let them know that you are a valued customer. Many consumers who ask for lower interest rate, get it on the spot,” she says. Also, set up automatic payments and alerts for bill notification when due dates are near.
If in deep debt, determine the root of your problem, and seek help. Communicate with creditors and try to make arrangements. The National Foundation for Debt Management, a nonprofit agency, offers information and resources on its Website as well as from its financial counselors.
Saving
Evaluate your overall budget. Look at major categories of spending such as transportation, household, and food expenses, and determine areas where you can cut costs.
Seek discounts or refinance. For example, you could consolidate your auto and other types of insurance with one company to get a deal, or comparison shop for better quotes. Look into refinancing a current loan, such as your auto loan, to get a better interest rate. With grocery shopping, coupon clipping can help, but be smart about where you shop.
“Whenever you achieve a cost savings, you can knock out your debt or set aside money for cash reserve,” she says.