By Patricia Kitchen
RISMEDIA, March 4, 2009-(MCT)-What a difference nine months make. In the not-long-ago credit-card binge days, one of the “in” things was to own a TV the size of a bus. Today, it’s to have six months of living expenses saved in case you get laid off.
Until recently, buying was the social norm-”having stuff, having name brand stuff, having the new, the bigger, the more,” said George Barany, director of financial education for America Saves, a Washington-based educational nonprofit. Today, he said, wearing last season’s clothes or holding onto a car longer is more acceptable among consumers.
Tough times have also altered one financial planning basic-that consumers with considerable credit card debt should divert money away from savings to those balances. Today, experts say, if you don’t have six to 12 months of living expenses saved, pay the minimum on card balances and grow that kitty. Experts say interest will add up, but if you do not get laid off, you can use some of the fund to help pay down debt once the economy picks up.
People talk about saving for a rainy day, but “it’s raining right now,” said Jon Gaskell, co-founder and head of business development for SmartyPig.com, a virtual piggy bank that combines a savings program with social networking so users identify savings goals and set up automatic deductions from checking accounts.
How to save
You can’t beat the autopilot approach, experts say. Assuming it’s an option, ask your employer to automatically deduct a certain amount each week and deposit it in a savings account, preferably one to which you don’t have too easy access, said John Tweedy, a Floral Park certified financial planner. Some employers also allow you to earmark all or a portion of future raises to savings.
In these tough times, don’t neglect the off-the-radar-screen approach says Ethan Ewing, president of money portal Bills.com. That’s regularly socking away a small, almost unnoticeable, amount, such as stuffing a dollar bill every day into a jar or piggy bank or regularly dropping your small change into a coin jar.
While many people wait until the end of the month to see how much is left to save, Galia Gichon, a financial expert in Manhattan, suggests you work in the opposite direction. Plan ahead for weekly out-of-pocket expenses, take out enough cash, commit to living within those confines, and save the rest, Gichon said.
As a rule of thumb, money experts suggest putting 10% of take-home pay toward long and short-term savings/investing. But that depends on individual circumstances.
What’s most important, said Barany, is to start saving on a regular basis-whatever the amount. You don’t have to “go from zero to 100 in one step,” said Barany, who added that it’s crucial for singles and families alike to maintain a minimum of $500, preferably closer to $2,000, to cover unexpected expenses.
Paying with cash can often save you money. If you have the cash to buy new tires for, say, $300, you can say to the merchant, who has to pay a service charge on credit card transactions, “I have the cash right here. Can you give me a discount?”
Roberta Schroder, chairwoman of the economics and finance department at Nassau Community College, said she suggests students have a safety cushion of three months’ living expenses. They often feel that just one month will do as, “my mother will pay for it.” But these days, Schroder reminds students that mom may have her own financial headaches.
Where to put emergency money
For money you may need to access quickly, Tweedy suggests researching online money market accounts that pay the highest interest rates, ones that are insured by the Federal Deposit Insurance Corp. Check rates at Bankrate.com.
Ann Diamond, a chartered financial consultant in Manhattan, who also coordinates financial literacy programs, suggests the following: Those with emergency funds of nine to 12 months of expenses, invest:
- Three months in an online money market fund — recently Bankrate showed a high rate of 2.53%
- Three months in a slightly higher-yielding short-term CD, with a recent six-month CD rate of 2.57%
- Three more months in a longer-term slightly higher paying CD, with a recent nine-month CD at 2.71%, and so on.
Cut back on 401(k)?
Experts say don’t do it unless it is temporary and to build up ready cash. If your employer matches your contributions, the “plan is the best deal in the world. It’s free extra money, nontaxable, and if you do the math, you’ll see why,” said Michael Kresh a certified financial planner in Islandia, NY. That’s even if, like so many, you’ve seen your balance plummet. This year employees can put in up to $16,500, with those age 50 and up allowed a further $5,500 as a catch-up.
“Think of your retirement savings as a forest,” he said. “After the wildfire passes through, when it seems like there’s nothing left, the forest returns, slowly and steadily … a retirement portfolio can recover if you continue to fund it.” Even if your employer stops matching your contribution, as many have, “you should still be saving as much as you possibly can,” he said.
“First, do not let fear overtake you,” Kresh said.
When it comes to stocks, look for companies that don’t have a lot of debt and do have cash flow at the end of the day.
Also, “people still need to buy food and household goods. The future of this country depends upon infrastructure and an expanding green technology and energy sources,” Kresh said. “Fear is driving down the prices of companies that will be very successful in the next three to five years. Let those who sell in fear give us bargains now.”
Copyright © 2009, Newsday, Melville, N.Y.
Distributed by McClatchy-Tribune Information Services.
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