Our ailing economy/ Part six: Guarding your assets

Advice to help reach your financial goals

By Tim Grant, Pittsburgh Post-Gazette


The dawning of a new year can be a great time to re-evaluate financial goals for a brighter economic future. That is especially true this year for those investors who are trying to recover what they may have lost in the financial crisis of 2008.

What follows is a series of tips and advice from financial experts who were asked to weigh in on the four most vital aspects of personal finance: spending and saving, jobs, investment and homes.


SPENDING AND SAVING

Not saving enough and taking on too much debt can be a recipe for financial ruin, as many borrowers learned last year based on the growing number of defaults on credit cards and automobile loans.

Setting reasonable goals for the New Year concerning saving, reducing expenses, avoiding debt and living within your means could be the cornerstone of a solid plan for financial security.

• Pay yourself first. When you make out checks to pay the bills, don't put yourself last. There may not be enough to go around. Make that first check out to yourself.

"Many people got used to the idea that the gravy train would always keep rolling," said Will Hepburn, president of Hepburn Capital Management in Prescott, Ariz. "They counted on their homes, wages and 401(k)s continuing to go up.

"What's evident now is they are going to have to not rely on any outside influences. They have to learn to count on themselves and that begins with personal savings."

• Have an emergency cash fund. Most experts recommend having at least six months worth of income set aside. "When we do financial planning with clients we encourage them to have an emergency cash fund of six to nine months of monthly expenses," said Katie Larsen, an adviser with Merrill Lynch in Sewickley.

• Reduce or eliminate debt. Look for lower credit card rates. Consolidate high balances to one card with a low interest rate and pay off balances.

• Set a budget and stick with it. Figure out your fixed and variable costs each month and compare them to your net income. Getting a handle on how much you spend could help you stay within limits and avoid using credit to fill the gap.

"Our company has dealt with middle income families for a very long time and one of the things I've discovered in my 15 years in financial services is very few people live on an actual budget," said Luis Muniz, a senior manager at First Command Financial Services in Boiling Springs, Cumberland County. "The biggest piece of advice I could give is to establish a budget and stick with it. It requires discipline, which is why it's so challenging."

• Evaluate your retirement savings strategy. "Individuals need to look at their expectations of their standard of living in retirement," said Tim Noonan, managing director at Russell Investments in Tacoma, Wash. "As a rule of thumb, people who have a spending plan that calls for them to spend more than 9 percent of their nest egg a year will almost certainly run out of money. We also know if they spend less than 4 percent of their nest egg they will never run out."

• Know your credit score. FICO scores are available through all the major consumer reporting agencies. You are entitled to receive a free credit report from each of the big three credit-reporting agencies -- Equifax, Experian and Transunion -- once a year. You can obtain it from the official Web site at www.annualcreditreport.com.


JOBS

The past year was a bad one for job losses across the nation and it could be anyone's guess when things will turn around. Nearly 2 million workers became unemployed in the past 12 months and many people who currently have jobs are feeling less confident about their future employment security.

With the right career strategy, workplace experts say employees have a better chance of avoiding a pink slip.

• Make yourself indispensable. Discover and make the most of the points that build your distinction from others at your workplace.

"Most people get caught on the idea that all you have to do is be really good at your job," said Scott Halford, author of "Be a Shortcut." "The truth is the people who are keeping their jobs are really good and have a high degree of emotional intelligence."

• Emphasize your uniqueness. Figure out what you bring to the table that no one else around you has. "Every person needs to think every day of an answer to the question of why their roles exist in an organization and why they should be the person holding that role," said Ben Dattner, a professor of psychology at New York University.

• Be as productive as possible. "You have to be producing at a level that is above and beyond what is expected in your position," said Shawn Graham, Director of MBA Career Services at the University of Pittsburgh.

• Grow to make yourself more marketable. "Take advantage of any opportunity in the organization for training," Mr. Graham said. "Get involved in different projects. Do anything you can to round out your skill set."

Employees who are hiding their heads in the sand and only hoping for the best are prime candidates for obscurity in the workplace. Workers must ask themselves how can their boss tell the difference between them and their colleagues. If there is no difference, that could spell trouble.

• Research the organization for which you are applying to work. "You need to know what they do and how they think so you can imagine how you can add value," said Jay Forte, author of "Fire Up Your Employees and Smoke Your Competition." "Companies really applaud people who do this homework because you make their work easy for them."

• Know your talents. The particular job you hold in a company must be in line with the way you think so you'll be excited enough about the job to be really good at it.

"It's one of those things that will get you noticed and keep you hired," Mr. Forte said. "In today's world, the good and average ones don't remain employed. You've got to be great."


INVESTMENTS

As investors receive their year-end statements from brokerage firms and mutual funds, many of them will wish they had not opened the envelop, especially if they've grown used to seeing their account balances go up.

The 2008 stock market crash that ravaged Wall Street devastated many small investors' faith in the financial system, leading them to make emotional decisions that might have ended up costing them more.

When sailing rough financial waters it often helps to have a good guide. So, we've asked experts who tackle money problems every day what lessons from last year can be applied to making future investment decisions?

• Stick to your game plan. "Because of what's happened in 2008, especially the last four months, a lot of folks took their eyes off the long-term game plan and became short-term investors," said Ted Bovard, an adviser at Fort Pitt Capital in Green Tree.

"A lot of younger folks are turning to cash in their 401(k)s and even cutting back contributions. Retirement is a long way out, and they are looking at what's happening today and thinking short-term. Even people in retirement will need a portion of their assets in equities to offset rising costs in food, health care and everyday expenses."

• Diversify, diversify, diversify. "More than 90 percent of your return in a given year depends on how you diversify between large and small companies, U.S. and international companies and bonds," said Robert Chiocca, branch manager of the Charles Schwab firm, Downtown.

"Too often when people develop a portfolio and assess the risks, they overweight themselves, either too aggressively or too conservatively," Mr. Chiocca said. "If you look back at 2008 if you had been too heavy in equities and had no exposure to bonds your performance would have been much worse than if you had some bonds and fixed income in the mix."

Have at least 20 stocks, but no more than 40 in a portfolio, says Bob Hapanowicz, president of Hapanowicz & Associates, Downtown. Any fewer than 20 stocks "is not diversified enough," he said. "But any more than 40 is too complicated to follow for most people and it would be difficult to do the research."

• Have plenty of cash. "Older folks about to retire need to always make sure they have somewhere between three and six years of their cash flow needs in cash, CDs and bond funds," Mr. Bovard said. "With that, they can weather every economic downturn.

"Those are comfort-level ranges. Some clients want 10 years in reserve. Others are happy with three to six. When the market is going up, people are comfortable with less of a safety net. But when it's going down they want more of a net."

• Beware of playing it too safe. As we go into 2009, many investors have shifted their assets to bonds when there will be opportunities to profit with equities. "Be careful not to go to one extreme," Mr. Chiocca said. "Now people are scared of the market and putting all their money in fixed income investments when they should be buying equities because they've gone down so much."

• Have a "sell" discipline. It's easy to be emotionally attached to an investment and ride it all the way down. It's important to set some performance parameters for each investment and stick with it.

"Some people say you should sell if a position drops more than 10 percent from where you bought it," Mr. Hapanowicz said. "Others say if you pick good companies and market leaders, a drop of 10 percent is a good point to add to the position. We believe those decisions are best left to professional money managers."

HOMES

For homeowners who may be feeling uptight about their home values, the dramatic decline in mortgage rates could at least represent an opportunity to save some money on payments.

While lower mortgage rates may not help homeowners facing foreclosure and are unable to sell their houses, they will reduce the cost of monthly loan payments for those who are able to refinance.

It also should help ease declining home prices, which are expected to continue falling in 2009.

"There have been moments recently when people have been able to get refinanced for under 5 percent on 15- and 30-year mortgages," said Greg Sorce, an adviser at HBK Sorce Financial in Cranberry. "One of the things that can really help the bottom line for families who are struggling is to refinance higher interest rate long-term debt."

Homeowners can take advantage of the historic low interest rates and make a big step toward improving their personal finances by following a few basic steps.

• Consider how long you will stay in the house. Make sure your monthly savings will pay back the cost of refinancing the mortgage while you are still living in the home. If you sell before the refinancing has paid for itself you won't be saving anything.

• Examine the cost of refinancing. Your refinancing cost is the total of any points, closing costs and private mortgage insurance premiums that you pay when you take out a new loan.

Any lost tax savings also should be regarded as part of the cost of refinancing. If you're paying less interest on your new mortgage you'll have less to deduct on your income tax return. If this makes your tax payments higher, it will offset your savings.

Divide the total of the points and closing costs you paid by the net monthly savings the new loan provides you to see how many months it will take to recoup the costs.

"The longer you plan to stay in the house the more sense it makes to refinance," Mr. Sorce said.

• See if the lender will lower the interest without refinancing. Mr. Sorce said people who just bought houses in recent months should contact their lenders to see if the lenders still have the mortgages. If they haven't sold the mortgages to other companies they might reduce the interest rate for a small fee without going through the whole refinancing process.

"They are willing to do that so that you don't refinance it somewhere else and they lose the loan," he said.


Source

To re-evaluate financial goals are a better solution to recover the lost of the investors last 2008 financial crisis.