First we can agree that next year, more companies will probably close their doors, so this means more lay offs bringing unemployment rates to over 6.7 % a 14 year high. Second, we can agree that banks and credit card companies will continue to be skittish in lending and trying to minimize their losses, so this means less available cash flow, lines of credit, higher interest rates on cards and possibly lowering card limits or freezing balances, banks will try to remained positive by still keeping lending rates high as they pay low rates from the Feds. This is called arbitrage and that is how they make their money, and do not pass the saving to consumers. Third, we can agree that the economy will take a least a year to rebound depending on the government decisions, perhaps longer than a year. Four, the Feds do not have a plan to help small business owners so you are on your own, they may bail out big companies even though small businesses account for over 50% of commerce in this country. And lastly, we are procrastinators and spenders, so next year some hard decisions will take place. So let us begin with the action plan you need to weather the storm and sail to a nice warm port for holidays:
- Pay off credit cards as soon as possible, do not count on them for cash flow. Allocate enough funds to pay them off during next year. Reserve an free annual fee card with low interest and cash/miles back to use. Store cards belong to the shredder for good. This year is paramount to execute this new year resolution. I hope you paid with cash for your gifts during the holidays. Start paying off the highest interest rate bearing cards and work your way down to the least interest rate card. Refrain from using other cards to pay off balances of other cards, it is a vicious cycle.
- Start an emergency fund account, you will need a minimum of 6 months of income and work for the account to be funded for a year of income. The reasoning behind this is to allow you ample time to recover without going into more debt or without borrowing at high interest rates. This fund is only to be used for emergencies such as: being laid off, car maintenance, fixed expenses, mortgage, insurance. Stay away from check cashing places, even though these will be out by 2010 and not soon enough, they have high interest rates on loans. Stay clear of you retirement savings accounts such as your 401Ks or retirements accounts, these are for retirement only and not to fund emergencies, many have already tapped into their accounts, it is a double edge sword, you pay a 10% penalty for taxes if under 59 1/2 years of age, and additionally, so you are selling your shares at the lowest possible value so you are also loosing again by selling low. Remember you always want to sell high and buy low and not the other way around, tapping into your retirement funds are not what to do during a recession. An emergency fund account is a cornerstone to financial stability and wealth accumulation.
- Keep investing in your 401k/403b and retirement accounts, if your employer is still matching your contributions, it is free money and will go a long way in the future. During these times, contribute only the matching amount from your company and use the rest to pay off high interest rate credit cards since you are gaining on the interest you are paying down from a possible negative rate of return. Stay the course if you already lost value in your account. Remember, allocation models are design for the long term investment, the market will rebound, just be patient.
- Start or revise your financial plan, this is key for next year, by putting figures on paper and using professional help, you will save hundreds if not thousands of dollars. You will be taking charge on your finances by addressing these issues head on, no matter how your finances are, you have to start sometime. We have helped clients map their goals and they are on their way to taking control and feeling safe. A detailed financial plan will help you map out your goals and trouble shoot shortfalls, you will be able to learn during the process and see how it works step by step.
- Be frugal on your spending, next year will take some discipline and commitment to make changes. It is not easy as we habitually do not take the time to analyze our expenditures on a daily basis. Yes, I mean daily. One way to start, after you have your plan designed, you take cash only for every week of the month to use for your daily expenses, such as coffee breaks, lunches and incidentals. The amount is determined by you, refrain from using your debit cards or credit card for purchases. This will limit your spending until your allowance is gone. Very simple and it works!. You will be surprise how much you can save by using this strategy, at the end of the month any surplus money will go into your emergency fund, in addition to a predetermined amount from your monthly cash flow. A list of monthly expenses will be detailed in the plan, this will help you track them and make adjustments as needed, remember it is still your own financial plan. The hardest part is the discipline to maintain it, without going back to the routine from past years.
This action plan is basic and should get everyone started on the right direction for next year, more detailed planning concerning family and investments decisions should be left to your advisor who will help you along the way, that is what financial planning is all about, shoulder to shoulder advice. I hope you can feel excited for next year as I am. If you can look back at 2008 and decide to make changes, 2009 is the year for it. You may call me or my associates for any help or advice. Our first consultation is "gratis" and we are here to help.
Happy New Year