NEW YORK (Money Magazine) -
These days it's sometimes hard to know what to worry about more -- the weak economy, the volatile stock market, unemployment or our usual concerns about families and friends.
Such anxieties can lead to poor decision-making. The best defense: Concentrate on what you can control. Every family has different needs but some things hold true for everyone.
Because times change rapidly, it's best to have a workable plan that you can stick to. The following four steps can get you going in the right direction.
Do a reality check. Figure out what assets you have and what liabilities you face. Knowledge is power.
Write down your short- and long-term goals. Are there trade-offs you're willing to make? Planning is all about priorities.
Reduce debt. Pay down your high-rate debt to maximize your financial flexibility. Make sure any money you need for the next three to five years is invested safely. That means in cash, CDs, money-market accounts or short-term bonds. Stretching for extra return isn't worth the risk.
Examine your spending and saving. These two items, says planner Suzette Loh of New York City, were "the overlooked aspects of financial planning in the bull market." Disciplined spending and a consistent savings plan are the keys to achieving your financial objectives. --Ellen McGirt
Stash Some Cash At Home
"I certainly have a week's living expenses around," says Mary-Jo Iacovino, a financial consultant with AXA Advisors in New York City. You'll need a cushion if ATMs go down or you have to travel on short notice. If you're a working parent, your kids' caregiver should know where that money is. "If you trust someone to take care of your children, it makes sense to trust that person with some emergency cash," says Iacovino. Don't leave money in your office though -- that's too risky.
-- Marion Asnes --back to top
Protect Your Portfolio
These days you may be thinking "safety first" for your portfolio, and for many people safety means bonds. But we'd be wary about going overboard.
Here's why: Bonds are safe only in the sense that you get a fixed interest payment and can count on getting your money back at maturity. The trouble is, right now those interest payments are painfully low.
Recently, 10-year Treasury bonds were paying 3.9 percent. You'll pay tax on that, of course; if you're in the 30 percent bracket, your annual yield falls to 2.7 percent. Inflation has averaged about 2.5 percent a year in recent years -- low but still enough to reduce your "real," or after-inflation, yield to 0.2 percent. So your money will be safe in Treasuries, but all it will do is sit there.
Buying bonds via funds adds another risk: The value of bonds falls when interest rates rise. That doesn't matter if you hold individual bonds to maturity, but it does affect funds, where the share prices fluctuate every day. Over the past three years, as interest rates fell, bond funds did well. But in 1994, when interest rates rose 1.5 points, the average intermediate-term government bond fund lost 3.8 percent. Today, with interest rates so low, the odds are that they will rise, possibly sharply.
By contrast, stocks are risky -- always have been, always will be -- but they also offer potential growth. Overall, stocks are looking a lot safer now than they were three years ago. Could they still go down? Of course. But they could go up instead. And you can take steps to reduce your risk.
Take a page from Warren Buffett's mentor, Benjamin Graham, and create a margin of safety when you invest. For Graham that meant keeping "never less than 25 percent or more than 75 percent" of your portfolio in stocks.
For the average investor, he viewed a fifty-fifty split between stocks and bonds as a reasonable starting point. He also favored moving money into stocks after a substantial decline -- and so do we.
Graham's advice: Restrict yourself to the stocks of established companies with long histories of earnings and dividend payments, and buy them at reasonable price/earnings ratios. We look at 5 candidates in "Opportunity Stocks."
-- Eric Gelman --back to top
Review Your Life Insurance
If you have dependents, you probably need life insurance. Term insurance is usually a cheaper and often a better choice than universal life, or permanent insurance.
Calculate how much you need There are two ways. The first is known as a present-value calculation -- the amount you would need to invest now to replace lost income and address future debts and expenses if you were to die.
|Money 101: Life insurance
It's not a simple calculation; for help, use the calculator at the life-line.org. Or you can simply buy enough life insurance to give your family a percentage of your income -- 70 percent is a common choice -- until your children are grown or your spouse is eligible for retirement benefits.
If your family has enough assets to keep the household running. If one spouse dies, a second-to-die policy may be far cheaper. "These policies help protect dependent children and the estate [by paying estate taxes] if the remaining spouse dies," explains David Woods, president of the Life and Health Insurance Foundation for Education.
One caveat. Chances are, your initial price quote for any life insurance policy will be for someone in absolutely perfect health. If you are ill, have a recent history of illness or are even slightly overweight, your premiums will be higher. For women, beginning the underwriting process before you start a family (rather than after, when you're still struggling to lose weight from the pregnancy) may get you a cheaper rate.
-- Ellen McGirt --back to top
Secure Your Home
Home-security systems are a good thing, right? Insurers think so: If you get a system that notifies an outside network, they'll knock 15 percent to 20 percent off your home insurance premiums.
And this is a good time to buy. The average system costs $1,000 these days, down from $1,509 in 1990.
|The Money Lists
But consider this: False alarms have become such a nuisance that the Los Angeles police department and others have decided not to respond unless a person confirms that there has been a break-in. Many burglars have gotten good at circumventing these systems -- when they're on; 41 percent of victims didn't have the alarm on, according to a 2 1/2-year study conducted in the mid-'90s in Connecticut by Simon Hakim, an economics professor at Temple University.
System or no system, there are things you should do now.
Get the right doors. All doors that lead outside should be metal or solid-core (1 3/4-inch hardwood) and fitted with a deadbolt lock (minimum 1 1/2 inch).
Lock up. Secure sliding glass doors with bars or locks or put a wooden dowel or broom handle in the door track.
Lighten up. Make sure all possible entrances are well lit with a bulb that's 40 watts or higher. Also consider buying motion-sensor outdoor lights -- the automatic "on" function may scare a robber into believing he's been spotted.
-- Nellie Huang --back to top
The best policy is a Homeowner 3, or HO-3, policy, with a guaranteed replacement clause -- something that's increasingly hard to find. The next best alternative is extended replacement coverage. Get a policy that offers at least an additional 20 percent to 25 percent of the insured value of your house. Also, bear in mind some other factors:
|More insurance help
Construction costs are on the rise. As a result, make sure you're covered for the current rebuilding expenses. Insurers often underestimate these costs; you may want to pay an appraiser or a local contractor for an estimate.
Deductibles. Consider a higher deductible. It may leave you responsible for minor claims, but the savings help you afford more coverage for a catastrophe.
Building regulations. Be sure your policy covers the cost of meeting new building regulations, especially if you have an old home.
Loss of use clauses. These will cover your additional living expenses, preferably for 24 months.
Up-to-date? Update your policy every time you make significant improvements.
Personal property coverage. Necessary if your possessions are worth more than 50 percent of the value of the house.
Keep track. Keep an inventory of your possessions, preferably on videotape, in a secure place outside your home.
-- Jon Gertner
Documents: Safe vs. Safe Deposit
Your valuables are less vulnerable in either a safe or a safe-deposit box than they are in your jewelry box or filing cabinet. That said, certain things are best stowed away in one or the other.
What to put in a home safe.Valuable papers you might need to access when your bank is closed -- for example, passports, wills and insurance policies. Jewelry you wear frequently. You may net a small discount on your insurance policy for keeping it in a safe.
Cash. If, like many people, you're stashing away a thousand or so in case of emergency, better it sit in a home safe than, say, in the pages of your dictionary.
What to put in a safe-deposit box. Jewelry you wear only a few times a year. It can be five times less expensive to insure jewelry if you keep it in a safe-deposit box. The trade-off: You have to notify your insurer when you take a piece out of the vault and when you return it.
Hard-to-replace papers you aren't likely to need when your bank isn't open, such as stock certificates, titles and deeds -- along with a list of your bank and brokerage accounts, CDs and credit cards.
Collectibles you don't want to display, like stamps or baseball cards. (To protect them from flood damage -- the fate of a $40,000 Mickey Mantle baseball card when Tropical Storm Allison inundated a bank vault -- put them in Ziploc bags or Tupperware.)
Insure everything: FDIC insurance does not cover items that are kept in safe-deposit boxes.
-- Jean Sherman Chatzky --back to top
Estate planning: Do your paperwork
Write a will. Name an executor and make sure he or she knows where to find a signed, notarized original copy of your will -- it should not be in your safe-deposit box, which may be sealed at your death -- and the paperwork necessary to manage your affairs.
|Money 101: Estate Planning
Name a guardian for minor children. Name a guardian in your will and give him or her a standby guardianship proxy for your children. (Keep your copy of the proxy with your will.) This authorizes the guardian to make necessary financial and medical decisions for your children until the court officially certifies guardianship.
Make wishes explicit. Write a letter explaining how you want your children to be raised. Show it to the guardian to make sure he or she feels able to carry out your wishes, then store it with your will.
Special bequests. Write a letter saying who should get possessions with sentimental value. Keep it with your will.
Update beneficiaries. on your life insurance, 401(k), IRA and other accounts to match your will.
Name a health-care proxy and a write a living will. A health-care proxy can make medical decisions when you are unable to do so yourself, and a living will states your wishes about treatment. Give a copy of your living will to your proxy.
Execute a standby power of attorney. This allows someone else to manage your affairs and sign off on your accounts should you become incapacitated. (If you're married but have accounts in your name alone, your spouse will need a standby power of attorney to gain access to them.) Make sure the person knows how to find your papers -- and give a copy of the power of attorney to your lawyer.
-- Marion Asnes --back to top
Evaluate your job prospects
Getting ahead of the game is essential if you're facing a layoff. Here's how to begin.
|Help for the unemployed
Beef up your savings. "We always recommend having three to six months' living expenses in a liquid account for emergencies," says Jennifer Ridley Hanson, a planner with Financial Finesse in San Francisco, "but if you're in an uncertain job environment, you may need more." Put a moratorium on all unnecessary spending and enroll your family in a campaign to meet this goal.
Contact creditors -- credit-card, auto or mortgage lenders -- and ask for a temporary reduction in payments or a payment holiday. If you have a good history, they'll be more likely to work with you for 30 to 60 days. Faithfully bank all those savings.
Open a home-equity line of credit. While you're still employed, set up this source of emergency credit -- but don't use it.
Start networking. "You should always be thinking, What if I lose my job today?" says job coach Andrea Kay. "Do an inventory of your skills and dreams. Can they be transferred to a new area?" Update your marketing tools -- letters, resumes, portfolio -- to reflect any new skills and interests, then develop a strategy to get to decision makers who can help you find the perfect job.
Don't slack off. While you're still working, maintain of a level of diligence and integrity to the bitter end. That may get you a more valuable exit package, executive coach Lisa Aldisert explains.
See how much you can get. If you're laid off, ask for outplacement assistance, more severance and resources to conduct your job search. Advises Aldisert: "Consider your layoff notice a first step to negotiation."
And don't be afraid to request a temporary or part-time job within your current company. "You don't want to delay getting into a better situation," Aldisert says, "but taking a cut in pay or a part-time job can help while you search for something new."
Think about the tuition. If you have children in private school or college, contact the financial aid office. "If you have suffered a loss in either income or assets, we need to know about it," says Seamus Harreys, dean of Student Financial Services for Northeastern University in Boston. Be prepared to document your loss. It may take several conversations, but most schools will be able to help you calculate your new aid-eligibility levels.
-- Ellen McGirt --back to top
Guard against identity theft
Just because you're afraid of having your identity stolen doesn't mean you're paranoid. Last year 161,819 people notified the Federal Trade Commission that they'd been victims of identity theft -- and the real numbers may be far higher.
|Guarding your identity
Now come the marketers, using your fear to sell you identity-theft protection. Frank Abagnale, the former con man who was the subject of Steven Spielberg's Catch Me If You Can, is now the spokesman for PrivacyGuard (www.privacyguard.com), which helps consumers monitor their credit reports for $89.99 a year.
Major insurance companies, including AIG, Chubb and Travelers, sell identity-theft insurance to help cover the cost and hassle of getting your records straightened out. Then there are the credit-rating agencies; for $79.95 a year, for example, Experian will e-mail you whenever anyone runs a credit check on you. Or for that $79.95, plus shipping and handling, you can buy an ID-theft survival kit at www.identitytheft.org.
Beware of scams. There are also "products" that are really scams. Some promoters have been selling identity-theft protection in order to get information about you and, yes, steal your identity. In February, for example, the FTC reached a settlement with two Arizona brothers who allegedly charged consumers' credit cards $289 for bogus protection against frauds like theirs.
Do you really need even the legitimate products? Probably not. Robert Hunter, insurance director at Consumers Union, says you should use insurance to cover potentially catastrophic financial losses, not the relatively minor expense and inconvenience of restoring your identity.
As for credit checkers, an annual check with the three credit agencies (maximum cost, $30) should alert you to anything funky. "If you order a copy of your report once a year, you would see any fraud before it got out of hand," says Privacy Rights Clearinghouse spokeswoman Jodi Beebe.
Other precautions: Cut up old credit cards before you throw them out, shred all documents that show your Social Security number -- and don't buy "protection" from a telemarketer. For more tips, see the FTC's guidebook at www.consumer.gov/idtheft.
If you are defrauded, file a police report, notify the FTC (877-ID-THEFT) and put a fraud alert on your credit records. Contact Equifax (www.equifax.com; 800-525-6285), Experian (www.experian.com; 888-EXPERIAN) and TransUnion (www.transunion.com; 800-680-7289).
-- Amy Feldman --back to top
If, like 57 percent of the respondents to MONEY's online subscriber poll, you're worried about rising health-care costs, look into long-term-care insurance.
Among the factors to consider: Does your medical history or your family's make you likely to need months or years of care? Do you have assets of at least $100,000 but not enough to self-insure? Can you afford to keep up the payments if premiums increase by as much as 10 percent every 10 years?
If so, shop around for a policy from a financially strong company that offers many care options (from home care to nursing homes), a big enough daily benefit for your area, inflation protection and the longest benefit period that you can afford.
Check out Long-Term Care Quote at www.ltcq.net for price quotes and a questionnaire that assesses your needs and the cost of care in your area.
Also consider long-term disability insurance. If you're working, you need as much coverage as you can afford. Most group policies top out at 60 percent of your salary; even with a supplemental policy, you won't get coverage for more than 70 percent to 80 percent. Own-occupation policies will pay if you can't work at your own job, but they are expensive and hard to get. Policies with residual benefits will make up the difference if you can work, but not at your original job.
-- Jeanne Lee --back to top