Take These Steps … And Be Prepared

“There are no classes in life for beginners; right away you are always asked to deal with what is most difficult.”

- Rainer Maria Rilke

I like to be the bearer of good news to you, and to point out that there are (still) signs of life on the horizon for our economy…and for you.

First, the bad news:

The unemployment line is getting even longer, as Initial Jobless Claims showed that the number of people collecting benefits reached a record high of 5.11 million. Not surprisingly, Consumer Confidence fell to its lowest reading since records began in 1967. The sour report indicates that the fear of losing one’s job has made the consumer more reluctant to spend.

Gross Domestic Product (GDP) is the broadest measure of economic activity – and for the 4th quarter of 08, came in worse than expectations and at its lowest reading since 1982. You can see the comparison for the last four years in the chart below.

The news on the housing front was also gloomy, as New Home Purchases dropped to the lowest level since data collection began in 1963. Existing Home Sales for January came in lower than expected– however, that number was probably influenced by buyers waiting to see what the government’s Stimulus Plan might have in store for them. We’ll see on that one.

But some good news from Reuters, as they released the results of a survey of 47 professional forecasters, predicting that the economy will begin to recover in the second half of this year

(http://www.reuters.com/article/newsOne/idUSTRE51M1T920090223).

Additionally, the Chicago Purchasing Managers Index was better than expected, and being a forward-looking indicator, gives another bright spot of hope down the road.

But I thought that I would take this week’s Personal Strategy Note, as tax season goes into full-tilt around here, to give you some simple steps to being prepared for WHATEVER the economy might throw in your direction.

Read on…and post your feedback!

“Real World” Personal Strategy

Six Steps for Financial Preparedness — Bracing Yourself for a Storm

Last week, I focused on mindset issues, and it’s my firm belief that how you choose to think about your situation has a subtle, yet profound, impact on how you handle the storms. This week, I thought I’d give you a short run-down on specific, financial steps to put in place so you can be ready for what the rest of the year throws our way.

First, put $1,000 aside. It doesn’t amount to a real emergency fund, but it will do until you get your finances in order. You can accumulate the $1,000 by allocating $10 a day for just over three months. Most people go into debt because they live hand to mouth, spending 100% of their take-home pay. Then life happens. Having a mini-emergency fund can help you get out of debt and stay out of debt.

The second step is to remove yourself from credit card debt–forever. I suggest paying off your credit card by starting with the smallest balance in order to achieve small successes and then working to snowball your payments as you tackle the larger balances. These first two steps, having $1,000 and paying off debt, simply prevent you from facing a financial emergency by starting out wounded and bleeding.

The third step is to improve your ability to handle fluctuating monthly expenses. If you can, set up a monthly budget so your day-to-day expenses are less than 65% of your take-home pay. The difference between those growing rich and those remaining poor is not the salary they make. It is the salary they keep. Relative to their income, the rich are frugal. They save and invest. They spend less than 65% of their take-home pay on day-to-day expenses. They save at least 10% in their retirement accounts and another 5% in taxable savings. They direct another 10% toward unknown big purchases. And they even live frugally enough to give another generous 10% to charities.

Once you’ve set your budget so money is left over after paying the bills each month, in step 4 you automate your cash flow to promote saving and investing.

Every month, have 10% transferred into your retirement account before you receive your paycheck. Then automate the transfer of 25% of your take-home pay into an investment account a day or two after your paycheck is deposited. Automating your savings makes savings a high priority and ensures that you pay yourself first. This investment account will grow over time, and you can use it to pay for big emergencies and charitable gifts.

Step 5 is creating an asset allocation for your investments that’s diversified for safety while being invested for growth. If you make it to this step, you’re well ahead of the game…but the game ain’t over yet! Diversification works, and it’s never more obvious than in times of market turmoil. Without diversification, portfolios can have a zero return over a decade. After being well diversified, the likelihood of no return over a decade drops significantly.

The sixth and final step is mobilizing during an actual emergency. Having the discipline to budget for small financial emergencies will help you be prepared when you encounter larger financial crises. When some unknown spending need strikes, take the money to cover the expense from your growing emergency fund. Then, determine if you have been budgeting for this level of unknown expenses adequately.

Usually emergencies don’t happen. So the money you have socked away makes more money. Keep an emergency fund for several years and it should double in value, giving you an additional emergency fund. Whether you need it or not, being prepared for a financial emergency means peace of mind, knowing that your lifestyle is frugal so you won’t be in trouble.

There’s obviously hard work “in between” these steps…but take it from your trusted advisor. Starting NOW to move in this direction will make a big difference in your life.

To more of your money in your wallet!