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Rainy day strategies
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April 20, 2001: 4:49 p.m. ET
With common sense and planning, you can weather the economic storm
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - While stock traders cheered the Federal Reserve's interest-rate cut this week, others saw the negative message in the news: The U.S. economy is still on its sickbed.
But financial planners agree that a few basic strategies can keep you secure and even help you succeed in an environment of economic uncertainty.
1. Refinance
The Fed cut its target for the federal funds rate, an overnight bank lending rate, by a half percentage point Wednesday to 4.5 percent, the fourth cut by the Fed this year and the second between its regular meetings.
The rate cut is a good opportunity for people who want to take out a loan or refinance their debt at a cheaper rate.
"Do what every human being in America is considering: refinance," said David Caruso, Certified Financial Planner (CFP) and co-author of Let's Talk Money: Your Complete Personal Finance Guide.
Click here for a calculator that reveals whether you should you refinance.
Consumers saddled with what Caruso calls "garbage" debt -- credit-card debt, automobile loans and other debts that aren't tax-deductible and usually have a high interest rate -- can take advantage of low interest rates to pay off that debt quickly.
"The liability side of the balance sheet can kill you in tough times," Caruso said. "This is one good way of shoring up the 'horror' side of the balance sheet."
2. Rebalance
Financial planners may call liabilities the "horror" side of a balance sheet, but stock market volatility has lately made the asset side a little scary, too.
The key to riding out the storm is balance.
"My advice is the same as it was four years ago, when people started to go crazy," said Virginia B. Gerhart, CFP with Gerhart Associates in San Rafael, Calif. "You have to take the long-term perspective and diversify."
Mutual funds help investors do this relatively cheaply, but do your homework before picking a fund.
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Passive rebalancing is an inexpensive and uncomplicated way of creating a portfolio that will weather you through all kinds of things if you have a long-term perspective and don't get greedy.
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Virginia Gerhart, CFP |
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"Look at how fund managers manage," Gerhart said. Fund managers will often start out allocating certain percentages of their assets to certain types of stocks, but those percentages will change as one sector outperforms another, a process called "style drift."
Once you find a fund that suits you, check periodically to see how the percentages have changed. If one has gone way up, then sell the stock in that sector until the percentages return to their original levels. This process, called "passive rebalancing," forces you to do what all investors want, but few accomplish: buy low and sell high.
"This is a very inexpensive and uncomplicated way of creating a portfolio that will weather you through all kinds of things if you have a long-term perspective and don't get greedy," Gerhart said.
3. Go bargain hunting
The combination of falling interest rates and falling stock prices presents some buying opportunities for investors.
Companies that benefit from rate cuts include banks, mortgage lenders, utilities, and companies carrying a lot of debt. Some mutual funds have also taken a beating recently and could be bargains.
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There's no magic formula to get you through this. Return to the fundamentals. Look at what's on sale.
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Steven Kaye, CFP |
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"There's no magic formula to get you through this," Steven Kaye, CFP and president of the American Economic Planning Group Inc. in Watchung, N.J., said. "Return to the fundamentals. Look at what's on sale."
4. Get a plan and stick to it
One strategy that's almost as good as magic is drafting a plan for financial responsibility and sticking to it.
"The key to success is having some discipline," CFP David Caruso said. "You don't have to be rocket scientist."
Caruso suggested people make a simple, one-page plan and stick it to their refrigerators so they're forced to look at it every day.
"Make your worst enemy read your plan," he said, "so they'll mock you if you don't follow it."
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The key to success is having some discipline. You don't have to be rocket scientist
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David Caruso, CFP |
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Caruso's plan for himself would include refinancing his debt, rebalancing his portfolio, socking away at least six months' living expenses in a short-term bond portfolio or a money-market account, and getting help from a financial planner.
Investors would do well to get a certified adviser to help them write an investment policy statement to avoid making knee-jerk moves in reaction to sudden shifts in the stock market.
5. Prepare for the worst
If you think you might be the victim of the next corporate downsizing, there are several things you can do to keep your unemployment from being financially devastating.
First, save everything you can. If you refinance, put enough of the money you save into a money market account to cover living expenses for three-to-six months. Then, pay off your credit card debt if possible.
For a little extra cash, get your employer to withhold less from your paycheck.
Also, get a home equity loan now, while you're still working, so extra cash will be available when you're unemployed.
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The time to get your house in order is while you're still employed.
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Mark Groesbeck, CFP |
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Avoid cashing in your 401(k) and subjecting yourself to income tax on the plan amount and an excise tax. If you must cash out your plan, do it at the beginning of the year so you have time to save for the tax bill.
If one spouse is still employed and has a 401(k) plan, you could borrow against it until you find another job.
Make sure you can keep insurance coverage for yourself, either by using your spouse's benefits from his or her job or by saving enough money to pay insurance premiums yourself.
Most employers are required to offer cheaper COBRA insurance for a year after you leave them, but you must pay the monthly premium. Dallas Salisbury, president of the Employee Benefit Research Institute suggests you save enough to pay insurance premiums for 12-to-18 months.
You may also want to switch to a cheaper insurance plan before you get terminated, if your employer offers more than one plan, so your COBRA payments will be lower.
Most important, don't get caught flat-footed.
"The time to get your house in order is while you're still employed," said Mark Groesbeck, a CFP with the Stanford Group in Houston.
6. Get help if you're in trouble
Once your house is in order, the next step is to keep it in order, whether you lose your job or not. If you're having a hard time following the list on your refrigerator, you should consider professional help.
"If you're in over your head, go out tomorrow and see a consumer credit counseling service," Caruso said. "Talk to someone if you can't do the things on your list, or go find a financial planner to get some help." 
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