Smart Money Tips

Being financially prepared can help you make the most of your money—and your life!

If one positive has come out of the current state of our country’s economy, it’s that we’ve all—hopefully—learned a very valuable lesson: When it comes to your finances, you can never be too prepared.

I don’t care if you’re 60 and approaching retirement, a recent college grad settling into your first job or 45 and newly divorced. You always, always need to be looking toward the future, because as we’ve seen with this market, it might just surprise you.

Here’s what you need to do to shore up your personal balance sheet and brace for the unexpected:

Build a Cushion.
Having an emergency fund to fall back on can help you sleep at night during the best of times, but it’s during the worst of times—after a job loss or sudden injury—that it’s a true sanity saver. I suggest amassing three months of living expenses for a two-income family, and at least six if you’re single or your spouse doesn’t work outside the home. Remember, we’re talking about bare minimum living expenses here. If you’re laid off, your spending is going to come to a screeching halt, meaning your emergency fund doesn’t have to hold enough to cover dining out every Friday night, a daily trip to the coffee shop and a family movie on Sundays. You just need to have enough to float the necessities: the mortgage or rent, utilities, car payment, food. Where do you stash the cash? This money is all about liquidity, so check out money markets or high interest savings accounts. Bankrate.com maintains a good up-to-date list of the best savings rates.

Pay Down Debt.
Chipping away at credit card and other high-interest debt is one of the best investments you can make. Not only will paying down your debt cause your credit score to rise, your budget toward interest, you’ll have more to accomplish your savings goals. To begin, you’ll need to find some wiggle room in your budget. Track (using pencil and paper or your computer) where your money is going and brainstorm ways to cut back. You’ll be surprised at how much of your spending is discretionary—a sandwich, a rented movie, a big dry-cleaning bill. Once you see how the little things add up, you can make conscious choices about what is and what is not a worthwhile use for your hard-earned dollars. Then throw the savings against your debt, where it can really have an impact.

Save Aggressively for Retirement.
Putting away a small amount each month can really add up over time. If your employer offers a 401(k) plan, that’s the place to start, particularly if the company kicks in matching dollars. If you’re without a formal plan, look into Roth or Individual IRAs. But, by all means, do it automatically. The reason 401(k) plans are so effective is that they swipe money out of your hands before you have a chance to spend it. You can model that behavior by asking your bank or brokerage firm to make monthly deductions from your savings or checking account and sweep them into a retirement account. It’s never too late—or too early—to start saving.

Keep Your Portfolio on Track.
When you start investing, you need to make a decision about your asset allocation—the percentage of your assets you want in stocks, in bonds and in cash. Unfortunately, most investors make that decision once and don’t go back and rebalance. That can leave you taking more or less risk than you believe you’re taking. How do you solve this problem?The easiest way is with target-date retirement funds, also called life-cycle mutual funds. These are mutual funds with a date in the name—the 2030 fund, the 2035 fund. They balance themselves toward your retirement date. So, if you are a person who doesn’t have the time or energy to rebalance your portfolio and keep your asset allocations in line, it will happen automatically.

Protect Your Financial Life.
No one wants to talk about life’s traumas, but things like death, disaster, injury or divorce are all very real possibilities, and you need to be prepared for them. If you don’t have a will, if you haven’t named guardians for your children and if the term healthcare proxy is largely unfamiliar to you, I have one thing to say: There’s no time like the present. It’s the responsible thing to do. An estate-planning attorney in your area can help you, or if you find it’s too expensive, there is inexpensive software online. If you decide to go the DIY route, find a lawyer who will look over your final documents before you sign
to double-check you’ve covered all the bases. SFW

Check out Jean Chatzky’s tips for getting an A+ on your credit score in the Winter 2008 issue of SUCCESS for Women.

Additional Reading

• Spring into Action, and Save Some Green!
• It Pays to Shop Around
• How are Your New Year’s Resolutions Holding Up?