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Leaving Financial Woes Behind?

The Nasdaq and Dow have plummeted, and consumer confidence is running extremely low. Consumers, worried about their jobs and their financial futures, are looking for guidance on where to spend their money in 2003 and how to shore up their bottom line.

Advises Money Magazine's Ellen McGirt: "Treat your money with care, because in every aspect of our lives, we're spending more and getting less."

A number of accounting scandals at giant American corporate icons like Enron Corp., WorldCom Inc. and Kmart Corp. led to bankruptcies and billions of dollars in losses on the stock market in early 2002. Investors, who had already been questioning the economic recovery, began fleeing the stock markets in droves.

By mid-July, the Dow Jones industrial average was down 22 percent for the year, while the Standard & Poor's 500 index declined nearly 29 percent and the Nasdaq composite was off 34 percent. Consumer debt levels, accumulated from years of lavish spending during the boom times of the late 1990s, began to weigh on Americans' minds as they saw their once bulging stock investments shrink in value.

As a result, consumer confidence, which often predicts future consumer spending habits, fell from 96.9 in May to 87.6 in August, according the University of Michigan consumer sentiment survey. And that drop in confidence is beginning to show up in reduced retail sales. In August, sales at chain stores increased 1.6 percent, down from 6 percent in March. Economists closely follow consumer spending, which accounts for two-thirds of the nation's economy.

Still, the fundamentals are in place for a recovery and, given past behavior, business and consumer spending will likely pick up before the economy slips into recession.

If you are feeling the squeeze just two paychecks away from being in serious trouble, McGirt says don't procrastinate. "A new year is the best possible time to scour through bad habits and lingering problems and solve them, or at least start the process."

Here are her suggestions:

Get Very Serious About Saving Money
If you don't have 3-6 months of living expenses in a liquid savings account (more if you have a mortgage, a family, or are worried about losing your job), then you are courting disaster. Every part of our lives will cost more in 2003 - health care, transportation, education and recreation, for example - so it's time to become a more judicious consumer.

Be A Debt Warrior
The average credit card balance per household with at least one credit card has risen to $8,500 this year, up from $8,367 in 2001 (source Cardweb.com) What does that mean? Jane Public carrying an $8,500 balance at 14.71 percent will be paying off her cards for nearly 29 years and forking over $11,808 in interest if she pays just the 2 percent monthly minimum.

Solutions:

  • Switch to a lower interest rate credit card if you can
  • Pay as much over the minimum as you can every month.
  • If you don't have the cash, you can't afford it. Don't use your credit cards.
Rebalance Your Portfolio
Yes, it's scary out there. Five years of stock gains have been wiped out. Corporate scandals have eroded our confidence. And, the average employee watched his/her 401(k) fall 11 percent in 2001, despite having made higher contributions, according to Cerulli and Associates. But you must go back in. Why? The market remains the best wealth-producing vehicle around. Standing on the sidelines can be very costly - every dollar invested in the S&P 500 from 1982-2001 would have yielded $17. If you had missed the best 20 months by attempting to time the market, your dollar would have grown to just $3 - less than a T-Bill.

Steps:

  1. Reduce the amount of company stock (learn the Enron lesson)
  2. Correct your allocations - remember bonds? Cash? International stocks? Develop a mix appropriate to your time horizon and stop chasing the next big idea.
  3. Readjust your savings rate assumption - don't count on double digit market returns. Plan for a 7 percent return and build out your savings accordingly.
  4. Max out your accounts - Adjust your contributions to take advantage of the new limits - $11,000 per year, increasing $1,000 every year until 2006.
Love your home, but don't count on it as a retirement plan

Most Americans are returning to the safe haven of their homes for security and investment payoff. But for all the perks of actually living in your investment, real estate tends not to be the best bottom-line plan. It's illiquid and there's no guarantee of a profit from region to region. It can be a profitable lifestyle decision, but no substitute for a comprehensive savings and investing plan.

Money Magazine conducted a survey of affluent Americans (people with incomes of 75k +) to tap into what their fears and accomplishments were.

  • 85 percent wished for a bigger financial cushion
  • The majority of respondents cited retirement planning as their biggest worry
  • Only 20 percent described themselves as affluent - didn't "feel" wealthy
  • Most defined success by being "happy"
  • Overwhelmingly their biggest mistake was getting into credit card debt.
  • The majority of respondents believed that real estate, not the stock market, was the best way to get rich.