Dos and don’ts for dealing with economic instability

Economic crisis. Market meltdown. Government bailout. All these terms being bandied about these days probably have you wondering whether you should stuff your money into your mattress and, while you’re at it, hide under the bed.

You shouldn’t do that, nor should you panic. Regulators are taking swift action to bring stability to the market. The best thing you can do is ride out the short-term ups and downs with just a few prudent adjustments where necessary until it all shakes out.

Here are 10 recommendations from the money experts at Consumer Reports on what you should and shouldn’t do as the financial events unfold. We’ll be providing more specifics in the upcoming days.

What you should do

• Check your safety nets. Government programs to protect investments, banks and credit union accounts, insurance and other assets are reassuring in times like these. But these safety nets have limits. So be sure you know what they are and how to maximize the protection they offer.

• Follow the news. With swinging markets and new regulatory initiatives, things are changing quickly. For example, last week, with rising fears that money market mutual funds were at risk of "breaking the buck"—falling below $1 net asset value—the government established a temporary guaranty program to prevent that from happening. So don’t act on the latest news or assume that what was true yesterday is still the case today.

• Get your finances in order. There’s never been a better time to make a budget and start paying down your debt, credit card and otherwise.

• Rethink your plans to retire. If you’re expecting to retire soon, consider holding off for a while, if possible, until things calm down. That will give you time to reassess and, if need be, modify your plans.

• Call your financial adviser. With end-of-the-year tax planning an annual ritual, now is a good time to make an appointment with your tax adviser no matter what the economic outlook. He or she may have some advice on how to tweak your finances as you ride out the current storm.

What you shouldn’t do

• Bail out. Dumping your stocks or equity mutual funds now, when values are especially low, is simply guaranteeing that you’ll turn paper losses into real ones. Even if there’s more downside to come, staying on course often pays off during times of economic uncertainty.

• Stop saving. Those regular contributions you’ve been making to your savings or retirement accounts are an important part of good financial discipline, and there’s no reason to stop them now. We’ve long recommended a strategy of dollar-cost averaging your investments—making periodic contributions to your accounts, regardless of where the market is heading. That advice is as good as ever.

• Speculate. While lower prices for investments create opportunities, betting on the markets can easily get you into trouble, especially with the wild swings we’re seeing now. Small, measured investments are usually better than large, hasty ones intended to make a quick killing. Be especially wary if you get tips from e-mail, the Internet, or elsewhere for certain stocks, commodities, and other "once-in-a-lifetime" opportunities.

• Take on new debt. Be careful about acquiring new debt. Economic downturns can affect job stability and investment income, making it difficult to determine how much debt you can handle. If you must borrow, say, to put a child through college or make an emergency repair to your home, be doubly sure that you’ve examined all the options and risks, especially if you’re planning to use the equity in your home.

• Stop living. Although these times demand extra caution, there’s such a thing as over-reacting. Whether it’s buying gifts for the holidays or taking your family on vacation, life has to go on. And some cutbacks can have negative consequences for your wallet, such as putting off maintenance for your house or car or canceling insurance policies. So don’t overreact. Instead reflect carefully and, where necessary, adjust.

Comments

[Linda Wong]

I'm supposed to retire Nov. 1, 2008. I have a small IRA Annuity and TSA Annuity at National Western Ins. Co. which the DOE sold me in 1985. If I take a lump sum withdrawal I will get only $7000 each. If I take the intended 5 year payout at $500 a month ea. I will net $14,000 each and it will tide me over from 59.5 years until 62 when I can collect social security.
Do I need to take out the lump sum now due to the Financial Crisis and unstable annuities? I have a disability so I don't know if I can continue to work. I can't collect SSDI until I year after stopping work and was forced out of work.
Thank you very much,
Upset in Honolulu with a magazine subscription.

[Martha in Connecticut]

You suggest calling your financial adviser and then mention tax adviser in the next sentence. Should they be one and the same? How do you pick a financial adviser and make sure he/she will steer you right, not in a direction that profits them personally but could hurt your finances?

[Fred]

The U.S. Treasury Department announced the establishment of a $50 billion temporary guaranty program for the U.S. money market mutual fund industry. The whole industry has assets of $3.4 trillion.
Somehow, a guarantee of 1.2% of the total assets does not re-assure me much…

[Joel Lefkowitz]

Thanks for the dos and donts. It kind of reinforces my thinking on the whole matter. The thing that really bothers me is the retirement issue. My wife and I were planning on retiring/cutting back substantially from our current work schedule and have been looking forward to that day with great anticipation. It's kind of depressing to find ourselves thinking of putting those plans and dreams in a temporary holding pattern. Lets hope that our governmental leaders have the wisdom to prevent a worsening of the situation. However, I don't have a lot of confidence in the current administration.

[Sarasota Pisces]

Your article is good about holding steady and not bailing out. Most people rule by emotion and wind up buying high and selling low. I thank my lucky stars, she, my investment advisor, with Edward Jones calls me to soothe the waters and assure me. Edward Jones is one of the few firms that isn't a market maker and thus doesn't push holdings they own. We are our own worst enemy when it comes to investing. Hold tight, we have a resilent economy and it is only the investment banks and housing that are suffering the worst. The world is not coming to an end. Look up not down:)

[vicky]

Would right now be a good time to start fresh with bankruptsy with no debt?

[Kirk]

We owe $285,000 on our home valued now at $231,000(on zillow.com). I was recently unemployed and job prospects are better outside Michigan. What are the pros and cons of not making mortgage payments and having the bank foreclose? What could I expect fron the bank if I tell them I can't pay(Aurora?Lehman and Citi)? If I alert the bank of our dire straights and they can't help, I've given them a heads-up when our payments stop, right?

[Phillip Katt]

The US is heading into a deep and prolonged recession. If you are under the age of 45, you have never seen a really bad recession, like the one in the 70'S. Good people with excellant references and good work experience were unable to find a job.
From this point (Nov.2) the stock market is going to loose another 50%.
Unemployment will go to 10-12%, and house prices are going to drop another 20%-40%. This will be a real wake up call to younger people who think that you can eat out 3 nights a week, have $100. cable bills, and drive 2 new cars.
You may not feel the economy will get that bad, but ask yourself-
what if it does?
At this point, do not buy a house, get out of debt, and be willing to move where the jobs are. This is going to get VERY,VERY bad.