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Make a Plan to Reduce Your Debt
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The recession -- and subsequent slow recovery -- has caused millions of Americans to focus even more closely on living within their means. If you are ready to face up to your own financial realities, one crucial step is to set out a plan of action.
Here are some key considerations to keep in mind:
Keep Track of Your Spending
It's hard to reduce your spending if you don't have a good idea of how much you are spending. Keep track of your typical monthly expenses for three months to find out where your money is going. To get an even more realistic idea, factor in some unexpected expenses -- such as auto and home repairs. Once you have a record of your spending, compare your average monthly outlay with your monthly income. If you have a surplus, this is the amount you can apply each month to paying down debt and building savings. If you have a shortfall, you'll need to examine your expenses more closely to see what you can potentially cut back or cut out.
Keep Saving
One way to establish good saving habits is to make saving even easier than spending. A handy tip is to set up separate savings accounts with separate goals attached to them.
Here are three suggestions that can help you better allocate your savings:
Emergency Account:
Your goal for this account should be to build up at least three to six months of living expenses. This way, if you lose your job or need a lump sum to pay for a significant expense, you may not have to tap into your other savings or ring up more debt.
Family Account:
This account can help fund your children's school expenses (such as class trips and team uniforms) or vacations.
Investment Account:
This account should be reserved for general or long-term saving goals. Hopefully, you already have a retirement savings account (either through your workplace or on your own) and perhaps a college savings plan. But having another account to save for other longer-term goals -- maybe to start your own business or remodel your home -- can be a smart move.
Keep a Tight Watch on Your Credit Cards
If you've accumulated significant credit card debt, you've first got to stop the bad behavior. Paying off debt is easier once you stop using your credit cards.
- Pay off your highest interest credit card debt first, making sure you avoid the "minimum balance trap." Paying more than the minimum can make a big difference.
- Consolidate your debt by transferring outstanding balances to lower-rate cards. If you don't want to transfer your balances, you may be able to get your current credit card company to match the interest rate of a competitor.
- Cancel all cards except for the one that offers the lowest interest rate.
- Finally, set up a realistic payment timetable and stick with it. If you have trouble keeping pace, talk to a professional. The counselors at the nonprofit National Foundation for Credit Counseling can help develop a more structured plan for you. To find the nearest location, call 800-388-2227 or visit http://www.nfcc.org.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Advantage, Inc., a local member of FPA. |
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Strategies for Smart Retirement Planning
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Some factors that influence your retirement savings results, such as the types of investments available to you through your plan and the performance of the financial markets, can't always be controlled. But there are some factors you can influence that can help keep your portfolio on track.
Step 1: Stay invested.
It's not easy to see your account value decrease after a decline in the stock market, particularly after a steep, sudden drop of 10% or more. But one of the dangers of cashing out is missing a potential market rebound. Trying to "time" the market is a strategy even the most-seasoned financial professionals have difficulty mastering. It can also lead investors into the trap of "chasing gains"; that is, moving your money from one investment that's lagging into another one that's currently achieving better performance.
Step 2: Regularly monitor your investment mix.
One of the benefits of a diversified portfolio is balance. If one type of investment is experiencing losses, another type may be earning gains. Over time, these gains and losses may cause your asset allocation to skew away from your target mix.1 Your tolerance for risk may evolve over time. Lifestyle changes can also necessitate a readjustment to your allocation. That's why it's important to monitor your mix and make adjustments when necessary.
Step 3: Increase your savings rate.
Perhaps the most important way to help fund your future is to put away as much as possible. Finding the extra money to invest can be tough -- you've got plenty of expenses to worry about today without the added anxiety of worrying about tomorrow. But every dollar you can spare can make a difference. Whether retirement is just around the corner or 30 to 40 years away, regularly setting money aside -- particularly in a tax-deferred vehicle such as a 401(k) or tax-exempt account like a Roth IRA -- can often be the smartest move you can make.
2011 Retirement Plan Account Limits:
Maximum contribution limit for 401(k), 403(b), and 457 plan participants: $16,500
Maximum additional "catch-up" contributions for 401(k), 403(b), and 457 plan participants age 50 and older: $5,500
Maximum traditional IRA contribution: $5,000
Maximum additional "catch-up" contributions for traditional IRA account holders age 50 and older: $1,000
Maximum contribution limit for SIMPLE retirement accounts: $11,500
Maximum contribution limit for Roth IRAs2: $5,000
1Diversification and asset allocation do not ensure a profit or protect against a loss in a declining market.
2Roth IRA contributions may be made only by single taxpayers with modified adjusted gross incomes (MAGIs) of less than $122,000 and married joint filers with MAGIs of under $179,000. Phase-out limits for partial contributions also apply. If your MAGI is close to or over these limits, talk to your financial or tax professional before contributing to a Roth IRA.
This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Capital Advantage, Inc., a local member of FPA.
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4th Quarter 2011 Investment Report
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Market and Economic Overview:
The fourth quarter of 2011 was characterized by strong United States equity market performance across most all asset classes, nullifying the losses suffered during a tumultuous third quarter and bringing most market indexes to a predominately flat finish for the year 2011 as a whole. Ending the year on a strong stock market rally may have been a relief from a dismal third quarter and one of the most volatile years in the stock market on record; however, it was difficult to mask the disappointment from a year that began with the optimism of most economists and analysts predicting an emergence from global recession and a return to stronger economic growth.
International markets, especially Europe and the emerging markets, suffered a very rough year despite recovering slightly in the fourth quarter. This performance was partly triggered by China’s economic growth slowing from its’ consistently double-digit pace of most of the last decade to what many forecasters believe will be high single-digit GDP growth for the foreseeable future. However, the vast majority of international markets woes were most likely attributed to ongoing debt problems in the European Union that put its future in a state of flux. The situation with Greece has yet to be resolved and it now appears likely that Greece may actually leave the European Union at some point in 2012. The bigger picture of over-indebtedness as well as slowing growth in the Euro Zone has led to fears of a 2012 recession, which has most likely already been at least partially discounted into European markets with heavy selling in the second half of 2011.
Interest rates remained mainly flat for the fourth quarter of 2011, with the yield on the 10-year United States Treasury Note ending the year at 1.87% after starting the last quarter at 1.92%. The 10-year Treasury yield hit a high of 3.73% in February of 2011 when it appeared as if the world was poised to enter a new expansionary cycle and inflation was a concern. These continued historically very low interest rates, as well as good performance from United States equity markets in the fourth quarter of 2011, showed that America is still viewed by world markets as the safest haven for capital in a turbulent world. This point is especially notable as it comes closely on the heels of a United States credit rating downgrade by Standard & Poor’s, an action apparently not significant enough to scare investors away from United States stocks and bonds as European economic problems moved to the forefront. These capital flows to domestic markets are, at least in part, attributed to record earnings for most of the companies that make up the Standard & Poor’s 500 Index of United States large market capitalization stocks, leading to record 2011 earnings for the index as a whole.
Our Current Portfolio Strategy:
In an effort to minimize exposure to equity volatility, we remain over allocated to bonds relative to our typical allocation. We increased the duration of our bond holdings slightly in the fourth quarter of 2011, as we have become less concerned about the threat of inflation and rising interest rates at this point in time. In order to further reduce risk, we increased the credit quality of our bond portfolio as a whole. We also shifted our equity allocation more toward larger capitalization domestic stocks that pay dividends and away from smaller companies, both domestically and abroad. We also further reduced our exposure to both Europe and emerging markets, as presently, downside risk in those sectors looks greater than any imminent indications of a strong recovery. Depending on changing market conditions, we remain open to the possibility of shifting some of our fixed income allocation into the aforementioned domestic large dividend paying stocks.
Looking Forward:
At present, the overall forecast for global markets looks to be vacillating between very slow growth and recession, with Europe and the emerging markets likely to be the most volatile. In the United States, nothing has changed or been fixed regarding the ongoing political squabble over the government budget. The budget deficit (the amount of government spending that exceeds income) remains a large problem that has yet to be addressed by Congress in a meaningful way. Though running a budget deficit during recessions has long been a remedy prescribed by economists, the shortfall is made up for by government borrowing (issuing bonds), a situation that is unsustainable in perpetuity and will eventually lead to much higher interest rates, increased taxes, and/or large cuts to domestic spending. Furthermore, there remains massive government gridlock, which in these difficult economic times not only impedes recovery, but can create problems like we witnessed last quarter, with the brinksmanship over raising the debt limit, contributing to huge stock market losses. Another observation on the United States political environment: 2012 is a presidential election year, which has historically been a good year for stocks. However, it remains to be seen whether or not that pattern will continue, with partisan gridlock seeming likely to hamper any sort of government efforts to breathe life into an ailing economy and perhaps even roil markets again. As such, we see another round of a quantitative easing by the Federal Reserve Bank as a real possibility. Similar to the situation in the United States, the European debt crisis that came to the forefront last quarter has yet to be solved and is a large potential problem looming over the market.
Our current plan to handle the aforementioned outlook is to continue forward with our core strategy of investing in high quality, dividend paying companies that are focused on the domestic market. We are also increasing our bond credit rating, shifting more toward investment grade and away from high yield. We will also move forward with a limited exposure to Europe and emerging markets as we await further developments on how the Euro zone crisis may be resolved, and whether or not some countries end up leaving the European Union. There are several evident downside risks to the global economy moving into 2012: further United States budget cuts, continued high unemployment, a continued weak housing market, and a possible European recession and/or Euro restructuring. In the short term, continued market volatility appears likely, and we have already reduced our risk across the board in anticipation. However, we will be watching developments and economic data closely for signs of a brightening outlook in the new year and will adjust our strategy to in an attempt to profit from it should conditions warrant. |
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John Hayman, CFP®
Founder and President
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Donna Zinman, CRPC®, MBA
Executive VP
Senior Financial Advisor
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Dawnalizabeth Henke,
MBA, MSFA
Chief Compliance Officer
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Sylvia Hack, MBA
Senior Financial Advisor
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Rick McNamara, CMFC®
Portfolio Manager
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Colin Taylor
Investment Analyst
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Catherine Norris, RP®
Senior Service Advisor
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Jeannie Churchill
Service Advisor
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Amy Montano
Office Manager
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