Filed under: Uncategorized | Tags: debt, drive, economy, free, living, more, Weak
At a time when the average American household carries nearly $10,000 in credit-card debt alone, Barbara Brockaway?s debt-free household doesn?t seem so typical.
When Brockaway and her husband first married, they had student loans, some credit-card debt and a mortgage. But through some careful planning and a little bit of luck (for one, their Atlanta, Ga. home almost doubled in value over an eight-year period), the couple managed to pay all of it off and hasn?t owed a dime since 2003.
She believes that anyone is capable of doing the same.
?We?re not day-to-day, nickel-and-dime budgeters,? said Brockaway, a stay-at-home mother of two. ?I just think it?s just about paying yourself first, saving right off the top and living within your means. I think anybody can do it.?
Brockaway isn?t alone in her thinking. With lenders tightening their grip on credit and economic worries mounting, some say it may be more important now than ever to get out of the hole for good.
?We?ve been living this life of overextending ourselves and we need to get realistic now,? said Debbra Dillon, founder of Dillon Financial Planning in Eagle, Idaho.
Dillon, a certified financial planner who works mostly with middle-income clients, said the biggest drains on her clients? books tend to be credit-card debt and automobile loans — the latter of which has been made worse by the shifting auto market.
?Trucks and SUVs aren?t selling and people are stuck with these payments,? she said. ?It?s a real mess.?
Dillon said she doesn?t feel auto loans are ?worth? going into debt for, advising people to put aside the equivalent of a vehicle payment every month and pay for their cars in cash. While that sort of practice may have been balked at when credit flowed freely, it?s exactly the kind of practice that could catch on as people try to economize.
?I think people are realizing the picnic?s over ? it?s never going to be that easy again,? said Gerri Detweiler, a credit advisor at Credit.com, who believes ?fear and necessity? will drive a huge increase in the number of people aiming to live debt-free.
So do they do it? There?s no magical formula, but those aiming to live debt-free need simply to quit spending and start saving.
For Trent Hamm, a self-proclaimed ?spending maniac? who worked his way out of debt and now runs personal-finance Web site The Simple Dollar, it was all about baby steps — literally. His infant son served as the catalyst for his debt overhaul in the first place.
?I kept spending more than I was making over and over and over again, and I realized [my son] wasn?t going to have a very good future,? Hamm said.
Hamm and his wife began cutting back on their spending, making all of their meals at home and going out less frequently. Hamm also sold off his DVD and baseball card collections — moves that might seem minor, but have big impact.
?If you do 10 or 12 small things that don?t seem like that big of a deal and just start putting those savings towards your debt, your debt just starts disappearing,? he said.
And, while it may seem wise to dive headfirst into paying all your debt off at once, experts suggest getting a grip on one payment first.
?Tackle the highest-cost debt first,? Detweiler of Credit.com said. ?It becomes very difficult when you?re trying to spread your money across all your debt.?
Still, paying off your debt now shouldn?t come at the expense of saving for your future. Experts stress the importance of creating an emergency fund in the event of an unforeseen health issue or job loss. Dillon of Dillon Financial Planning recommends married couples set aside enough money to cover six months of expenses, and singles set aside enough to cover nine months of expenses.
She also reminds people not to forget about their retirement savings.
?Start paying down the debt, but don?t ignore the contribution to the 401(k), especially when you get a match from your employer,? she said. (more…)
Filed under: Uncategorized | Tags: Advisers, Answers, Crisis, Financial, Have, more, questions, than
BOSTON–More than 3,000 financial planners came here this week looking for answers.
They were told about how the economy had gotten so out of whack and what the bailout plan was supposed to do, about investment options to consider for the future and safe havens to run to now, but they never got what they came for.
That’s because the members of the Financial Planning Association who attended the group’s annual convention in Boston still have no clue for the biggest question they are facing: “What do I say to my customers now?”
Consumers working with financial advisers are likely a bit more comfortable than others as the current economic crisis unfolds. That’s not just because those folks have sufficient funds that they can afford to pay someone for financial advice. Nor is it that roughly nine in 10 consumers with a financial plan feel they have a clear financial direction — about 50% higher than for self-directed investors, according to a study released by the FPA and Ameriprise Financial.
It’s because the primary role of a financial planner is not just to manage investments and pick stocks and bonds, but to provide “emotional discipline” — the ability to foment a plan and see it through, regardless of market conditions.
Game changer
Where the do-it-yourself relies entirely on their own judgment — or what they read or watch in the media — the financial-planning customer has their adviser as a backstop, someone who can provide a heads-up to avoid trouble, who they can bounce ideas off and more.
But judging from casual talks with dozens of financial planners last weekend, the advisers are having a tough time right now providing that kind of emotional discipline, largely because they don’t have any comfortable answers. They are proactively contacting clients — and talking the panicky ones down from ledges — but they acknowledge that the standard advice isn’t making people comfortable right now.
That advice boils down to:
1. Stick with the plan, rebalancing if necessary but staying the course as best possible.
2. Cut your spending, as it’s the one piece of the puzzle over which you have total control.
3. Watch your income, and consider how to protect it, whether it comes from salary — where you may need to consider working longer — or from investments, where you may be able to weather market fluctuations so long as your income stays steady.
4. Don’t panic.
No one is going to take solace from that kind of counsel. While investors understood that bad times were possible — that the huge spikes of good years could become the awful daggers of a downturn — they never really expected to have it happen to their own portfolio.
“Everybody wants answers, but there aren’t any sort of answers out there that come with certainty or clarity, that say ‘This is what you should do right now,’” says Terence Odean, a professor at the University of California-Berkeley who studies investor behavior.
“You can make the case that there’s a good chance that the market recovers over time, and you can also make the case that there’s a real chance things turn out very, very badly here,” he adds. “We won’t know what’s right or wrong for a long time.”
Redrawing the map
With that in mind, investors are living in fear of two fundamental risks, the one that comes from staying with the plan, remaining invested and having the market sink lower and not recover for years, versus the risk of pulling everything out now, and then missing out on the recovery.
“In behavioral terms, it’s the risk of omission versus the risk of commission,” says John Nofsinger, a Washington State University professor who studies behavioral finance. “It’s failing to do something versus doing something that turns out wrong, and a lot of people get frozen in between.
“People tend to have a stronger regret feel for the act of commission,” Nofsinger adds. “When they act and it turns out poorly, they feel really bad about it. … That may be driving some people to hold tight right now, it may be driving their inaction.”
One thing that the current economy has clearly forced on financial advisers is a formal change in the definition of “short term.” This is a fairly common flip-flop; when the market is going gangbusters and investors don’t want to sacrifice returns, they tend to keep the short term short, lasting a year or two. That way, they can get more money into the market to take advantage of what seems like a sure thing.
Right now, judging from advisers at FPA, short term is defined as “five years,” meaning that any money you might need for at least the next five years needs to be in safe-haven investments or cash. Intermediate-term — which had been defined as two- to five years during the good times — now seems to be that period from five- to 10 years, and long-term investments are looking forward by a decade or more.
Plenty of advisers believe the market will snap back before then. Citing history, they contend that people will look back and see that they made money while investing in a bear market, but didn’t recognize it until the next bull market arrived.
Said one adviser, who asked to remain nameless because she is waffling on the right thing to say to clients: “They say you make money sometimes by doing what’s uncomfortable. … Well, everything makes my clients uncomfortable right now, whether that is staying in or getting out. I’m telling them that we’re making hard choices knowing what they need to do right now is take the strategy that they think is most likely to pay off for them and their family.
“Either way,” she adds, “it won’t be comfortable, and either way, they’ll have to live with it. So while I advise them to balance the risks and ride it out, I understand if they can’t do it. This is one of those situations where we won’t have any clear answers until we’re looking back at it and calling it history.”
Copyright © 2008 MarketWatch, Inc.
