The Dollar Stretcher : personal finances

What You Should Do Now

Gary — Tue, 13 Oct 2009 14:55:00 GMT

“Never make predictions, especially about the future.” - Casey Stengel

For years Casey Stengel managed in baseball's big leagues. Some of his quotes are legendary. But, given our current economy, I'd have to take exception to his advice. At least as it applies to our personal finances.

Let's look at some current information. Unemployment is at 9.8%. Nearly double what it was at the beginning of 2009. Hiring remains anemic.

The Congressional Budget Office (CBO) estimates that the fiscal year 2009 U.S. deficit will be $1.4 trillion. That's just under 10% of gross domestic product. Or to put it into perspective, during the last year the government borrowed the equivalent of 10% of every good and service the whole country produced.

There were over 1 million bankruptcies through September, 2009 according to U.S. Bankrtupcy Court. At that pace we'll see 1.4 million this year.

Forecasts for the economic future vary widely. Despite old Casey's advice you can find reputable economists who are willing to predict both recovery and a more serious recession.

So, while there is much uncertainty, there are still some things that you can reasonably predict about your personal finances.

First, you can expect some inflation. Over the long term there's only two things that can be done with the deficit. Congress can adjust future budgets to repay it quickly. Or they can devalue the dollar to pay it back with cheaper dollars later. Based on past experience, I'd say that they won't vote to repay it soon. So we better be prepared for some inflation (i.e. devaluation of the dollar).

What will that inflation mean to you? It will mean that it will take more dollars to buy things. Bread that cost $2 today will cost $3 tomorrow. If your income does not keep pace with inflation you'll suffer. Those on fixed incomes will be hit hardest.

Inflation can also devalue your savings. Whatever amount you planned for an emergency fund, college savings or your retirement won't be enough. You'll need to adjust your savings goals upward.

You'll also want to change the way you invest your savings. Reduce the amount that you have in CD's and money funds. Look to increase the portion in assets with prices that can increase. For instance natural resources (oil, gold, etc.) and housing.

Look for ways to increase your income. That may mean creating a second income source. It will be hard for many employers to raise your wages to keep up with inflation. Your pay could lag behind increasing prices.

Expect interest rates to increase. The government is borrowing more than ever before. You'll be competing with them for loans.

That means that you should pay off any debt where rates change with the market. A homeowner's line of credit is a great example. As rates go up, so will the cost of your HELOC.

Expect credit card rates to rise. First, because of generally higher interest rates.

Secondly, because the credit card reform bill of 2009 is forcing issuers to try to make more money from people who pay their bills on time. So instead of clobbering those who fall behind, card issuers will expect everyone to pay a little higher interest.

They'll also increase fees and reduce rewards. Much of that has already started. A good response is to slowly cancel cards you don't use. Especially recently opened accounts. Do this cautiously. Closing too many accounts too quicky could reduce your credit score.

If you have any other variable short-term debt pay it off as quickly as possible. If the rates are adjustable be prepared for them to go up.

Now might be a good time to consider refinancing your house. Locking in lower rates today is a good idea. Especially if you plan on being in your home for more than a couple of years. Bankrate.com has a good tool for comparing mortgage rates.

Think about what you would do if you lost your job. You may be fortunate and have a job that's secure. But most of us need to be prepared for either a pay cut, unpaid days off or even a layoff.

For instance, training for additional skills while you're still employed could be helpful. You'll find a whole list of things to do if your job is uncertain here .

Old Casey was right when he said it was hard to predict the future. No one knows for sure how long or rough this economic storm will be. But don't let that keep you from taking the appropriate steps now.

Gary Foreman is the editor of The Dollar Stretcher.com website and various enewsletters including Financial Independence. FI is a daily message designed to help people take control of their financial lives through achieving small daily goals. To find out more check out the Financial Independence page.

12 Things to Watch for in 2009

Gary — Tue, 06 Jan 2009 15:45:00 GMT

I enjoy watching the old westerns on tv. One thing I've learned is that is that if you're going to be a gunfighter you need to always know what's happening around you. Failure to do that could put you in the Boot Hill cemetary.

Right now our economy is a little like the wild west. Sometimes it seems like there's no rules. Or that whoever has the most guns get to make their own rules. So we might be wise to learn something from that old gunslinger and watch carefully what happens around us. We might keep our finances from an early burial. So here are 12 things to watch out for in 2009.

Watch for old pricing rules to become obsolete. You're going to have to pay attention to prices in the new year. Some prices will be trending up, while others slide down. And, some will change direction during the year. Now, more than ever, it's important to know your prices. Shop around for any major item . Use a grocery pricebook to keep track of food prices.

It's a good time to challenge your assumptions. Just because you always bought a specific brand or store doesn't mean that you should continue. Challenging times cause companies to do things they wouldn't normally do. Some may drop prices significantly. Others could lower quality. Just because you've known a product or company for years doesn't mean that they can't change. In fact, you should expect it to happen.

Watch for ways to save a few dollars. Even if it's only a dollar or two a day. With an increase in uncertainty, it's much more likely that you could need a few extra bucks in a pinch.

Watch out for inflation in 2009. As the government pours money into the economy some prices are bound to rise. It probably won't happen until people are comfortable that they can spend their money again. When they do we'll all remember why government borrowing is dangerous.

Watch for opportunities to stregnthen your position at work. Learn new skills. Be flexible. Do anything you can to make yourself valuable to your employer.

Watch for ways to help your friends and family. Even if you don't have money to spare you can help. Volunteer to help with a plumbing problem. Or save them the expense of a trip to the store by offering to pick up a few items for them.

Watch out that you don't put your family in jeopardy helping others. It's nice to be generous, but things like co-signing a note could put your finances in a world of hurt.

Watch for opportunities. Even in the most challenging times there are some opportunities. You'll need to think creatively. And, it might take some work. But I bet that there's someone who owns an unoccupied 'fixer-upper' home that would be willing to let a family live in it
while repairs and upgrades were made in trade for rent.

Watch your stress levels. When finances are tight it's easy to get stressed-out. Letting that stress build up will only make things worse. Don't sacrifice your mental or physical health or marriage to stress. Watch a sunset, listen to music or find some other healthy stress reliever. (btw, shopping is not an acceptable stress reliever)

Watch for unusual bargains. You'll find more 'liquidation pricing' on a variety of goods. Auctions will have fewer bidders and thus more bargains.

Watch your step. Now is a time to be careful in making big financial decisions. Especially since some of your prior assumptions could be wrong. It's true that many mistakes are made when we're in a hurry. Those mistakes could be very damaging in this economy.

Watch your tongue. Saying too little or too much could be bad for your financial health. There's nothing wrong with letting a few close friends and family know that you're facing some financial challenges. In fact, it's wise to do so. But, you don't want to go to the other extreme where every conversation revolves around your problems. If you go there, you'll notice that people begin to stay away from you.

Watch your back. Is there some problem or debt that's sneaking up on you? Do you have a major appliance (think furnace, AC unit, refridge) or car that's getting old and may need repair or replacement? Or maybe you're close to being unable to make a minimum payment that would trigger the default rate on all of your credit cards.

Keep on Stretching those Dollars!

Gary