Tackling the Little Things
Getting debt under control and improving savings habits are two big steps to a better financial life, but those actions only are possible if Americans have more specific aspects of their financial lives under control.
While the economy recovers, job stability remains a vast and very valid concern. Without income, saving stops and debt can spiral. Even if they still have a job, Americans need to assess their marketability and increase their professional value by networking and upgrading job skills.
If someone experiences a job loss, it’s important to be proactive. They should negotiate severance pay, file for unemployment benefits and look into alternative insurance plans, because living unprotected will risk their family’s security. Individuals who have lost their jobs also should immediately start looking for work. Most states allow people to work a certain number of hours, and earn up to half their previous income, and still retain unemployment benefits.
Those who are struggling financially also might find it difficult to pay their mortgage. If individuals have missed a payment, they should immediately search through financial records or identify spending habits to find out what caused the missed payment. They also should contact their lender, who is required to examine their client’s financial life before taking any drastic action against the client’s home.
Even without a job loss or mortgage trouble, it’s time for Americans to involve their entire family in assessing the household budget. Tracking spending for a month will reveal some easy places to cut back without causing any significant lifestyle changes. Turning off lights and appliances, cutting down on weekend trips and dinners out and eliminating habits such as smoking all will help reduce household spending. And, it will give the family a head start on saving in case of emergencies.
For Americans to recover, maintain or rebuild their financial lives after this recession, they need to make permanent changes so they’re prepared for any future trouble in the economy. Identifying areas in which they are struggling, scrutinizing bills and spending habits and prioritizing aspects of their financial lives will help individuals create a proactive financial plan to last the whole year, and beyond.
Next Up: Seven Resolutions
Changing the Way We Save
Although pre-recession Americans spent or consumed much of what they earned, the recession did provide a teachable moment.
In the 1980’s, Americans averaged saving 10 percent to 11 percent of their disposable income. By 2007 the Federal Bureau of Economic Analysis reported that figure dropped to a low of 1.7 percent. Only in 2009, in the midst of a recession that had Americans worrying about their jobs and futures, did the savings rate increase, but only to 5 percent.
It’s a start, but that rate is still less than half of what it was a quarter century ago. And it’s leaving a majority of Americans unprepared for retirement and emergencies.
“Americans are significantly ‘under saved’ as they near their retirement years,” Neiser says. “They’ll need at least 50 percent to70 percent of their pre-retirement income to live comfortably in retirement, and most aren’t even close to having the financial cushion to do that.”
In 2009, only 13 percent of workers questioned in the Employee Benefit Research Institute’s (EBRI) annual Retirement Confidence Survey said they felt very confident about having enough money for a comfortable retirement. That’s the lowest percentage since EBRI first asked the question in 1993 and a 50 percent decline in confidence since 2007.
The recession also taught us the need for having an emergency savings for our financial and psychological well-being. Having a cash nest egg can help consumers better weather the recession, and in the future, it will enable them to avoid accruing debt when unexpected expenses occur. According to the Consumer Federation of America, those with an emergency savings of more than $500 are less likely to worry, lose sleep, suffer poor health and decrease productivity at work than those who have saved less.
“It is the perfect time for individuals to take a hard look at their finances, spending a little less and saving more,” says Beck.
Up Next: Tackling the Little Things
The Best Recovery for a Financial Hangover
Resolutions Can Provide Rebound in 2010
For most Americans, the New Year is a time for resolutions. Resolving to become a better person is admirable. But as we emerge from the recession, from which some of us are still reeling, it's time for changes in financial habits that are permanent and have more staying power than the average beginning-of-the-year promises.
Before the recession, spending and consumption were the way of life in America. But during more recent, leaner times, we have been forced to face the damage done by unabashed spending and financing "the good life" with high-interest credit cards. And the damage remains.
“During this recession, all of us learned something about credit, debt and how and for what reason we spend money,” says National Endowment for Financial Education® (NEFE®) president and CEO, Ted Beck. “It would be a shame if we go back to our old ways of accumulating mountains of debt and saving little if any for our futures as things get better.”
As the economy continues to rebound in 2010, it may be tempting for Americans to ebb into the bad habits that led so many of them into financial trouble. That’s why in 2010, it’s important to evaluate your financial life and take steps to be better prepared should the economy once again fall flat.
First things first, 2010 will mean significant changes in the way credit cards are provided by banks and accessed by consumers.
The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 gives consumers more control over their relationships with credit card providers. As part of the CARD Act, back in August, credit card companies were required to provide consumers with 45 days’ notice before increasing rates or changing any significant terms of the credit agreement and to mail statements at least 21 days before payment is due.
These changes will help Americans to start paying off their average $8,000 in credit card debt, or $5,612 per card, according to the credit-reporting agency, TransUnion. However, more diligence on the behalf of consumers is necessary to get the most out of the legislative changes.
"[The CARD Act legislation] will level the playing field between the credit card companies and the consumer to have a real fair shot at planning and taking action on their personal finances,” says Brent Neiser, CFP®, and NEFE director of Strategic Programs and Alliances. “Consumers will have to be proactive though to get the full benefits of the CARD legislation. This means being diligent with reading and fully understanding all correspondence that is sent from your financial institution.”
On February 22, new rules will kick in including: a ban on retroactive rate increases on existing balances, except in cases of severe default; better disclosure in credit card terms so consumers can easily understand the contract and avoid unnecessary costs; and protections for college students and marketing done on campuses. For more information, visit here.
Next up: Changing the Way We Save
I've recently been very lax in keeping up with the news. Last I heard, Dubai caused a minor stir in the already-screwed up credit markets, sending markets into a tizzy.
I saw on today's newspaper the big headline, "Mortgage Rates at All-Time Lows." Sheesh. Haven't we seen this TV show before?
Must we go down the same stupid road that got us here? I know, the credit standards are supposedly much higher now than they were in 2006-2007, where anybody with a pulse (and some even without) could get a loan for a piece of property. But I have heard random radio spots that hint that things really haven't changed much. Stuff like "no money down," "seller financing," and "no doc" loans…
I'm afraid we haven't learned a thing from our very recent past. I can't say I'm surprised.
The fundamentals of the market psychology hasn't changed: It still seeks short-term profits over long-term prosperity. Slow and steady hasn't kept the market happy for decades. It likes the hare, not the tortoise.
I also saw that gold hit $1200.
So how does one protect himself during these times? I'd suggest that you stick with the same old, same old:
Depending on where you are in your life, you would do best to keep the bullk of your investable assets in stocks, some in cash, a little in bonds, very little in gold, and a bit in real estate. Note that I am not including your home in this assessment. If I did, most of us would have more than 50 percent of our assets in real estate (which might be a big part of the problem, right).
I still think the US is the place to be for innovation: IT, bio tech, medicine. But I think you may want to invest a considerable portion in foreign markets. China will not stop growing for some time. India is still going to improve. Latin America still has lots left, as does Canada, Russia, and Europe.
The world, as they say, is your oyster. Choose wisely, or else you may get one that's toxic.
Will I ever catch up? Will you ever read all this? 🙂
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