How to Profit From Last Year’s Lessons

             Many people graduated from the financial school of hard knocks in 2009. Reality really does bite. But what matters now is that you learn the lessons so you can move on.

            A recent MetLife study, Lessons Learned Poll, shows that people have indeed learned from their mistakes and have already adopted significant financial behavioral changes.

           One in five Americans has increased retirement savings (compared with 24 months earlier), and 20 percent report that they are more disciplined and conservative when it comes to their retirement savings/investments as a result of the recession.  Sixty percent of Americans who have taken action over the past year have managed to pay down credit card or other debt, and 35 percent have made regular 401k contributions, with 13 percent increasing contributions. To protect themselves from another financial crisis they said they plan to reduce spending on non-essential purchases (65 percent); build a cushion, (57 percent); allocate a portion of investments to a guaranteed income or very low risk products (17 percent); consult a financial advisor (15 percent) and diversify their portfolio (15 percent).

           Instead of stewing about what did or didn’t happen last year, here’s how to move forward.

           Establish an emergency fund. You probably no longer need convincing about why this makes sense. It’s a lot easier to pay off a $400 care repair bill with cash immediately than to charge it ton a credit card and “eventually” pay it off. “The interest could take that $400 to $800 pretty fast, especially at today’s current interest rates,” says Craig Steinhoff, a member of the American Institute of Certified Public Accountant’s National CPA Financial Literacy Commission. Free yourself from credit card dependence. “To establish this fund this year take whatever funds you can and put them somewhere and forget about them.. This could mean setting up a separate account and have a direct deposit of $20 per paycheck go into it,” says Steinhoff.  Shoot to save at least three-six months of living expenses.

           Don’t let fear drive investments.  Fear if a powerful tool in many situations, but cripples investment portfolios. The general trend when the market goes down is to pull the remaining money out, but history shows that investors that continue the course regardless of the ups and downs in the market will fare better in the end, says Jonathan Citrin, CEO of financial advising and planning firm CitrinGroup. Unplug. Turn off the TV, or at least be willing and able to take the hype with a grain of salt. Scrolling news headlines and the ever-present stock-ticker can be overwhelming, and sometimes hard to ignore. “Savvy investors will stay informed, but will not let short-term dynamics influence them,” says Citrin. Don’t give up on stocks but also consider bonds, says Darrell Canby, president of Canby Financial Advisors.

          Think global. The world became smaller in the past decade, which saw the emergence of china and India as economic superpowers. While people in China and India still live in relative poverty, both countries are likely to become much more successful and more powerful in the coming decade, says Canby. Other emerging countries are also likely to experience success. “Investors seeking higher long-term returns, as well as diversification, will need to consider investing internationally,” he adds. While there’s no place like home, sometimes you do have to leave your backyard (the U.S. stock market) for diversity and healthy returns. While diversity doesn’t eliminate risk, it reduces it, says Jim Cantrell, president of Financial Strategies.

          Monitor, monitor, monitor. Buy and hold is a strategy that looks good on paper, but truly need to be modified to: buy, hold, monitor and adjust, says Chad Olivier, a certified financial planner. “There have been and always will be great buy and hold investments. Nevertheless, continuously monitoring these investments is vital,” he adds. Numerous examples exist of companies that have had excellent growth rates sometimes attained because of the company’s cutting edge technology, lack of competition and/or successful management. A change in the factors contributing to a company’s growth at any point in time could greatly affect the results. “Buying and holding can be a beneficial long-term strategy, but don’t be afraid to make adjustments when necessary.”

             Live within your means. “The foundation for financial success is learning to live on 70 percent of what you make,” says Richard Kahler of Kahler Financial Group. Budgeting is not a dirty word and neither is a personal income and expense statement, says Kahler. Tracking your spending and creating a plan for how you will spend your income is a necessary survival skill in the 21^st century. “Those who choose not to use this skill will not gain and maintain financial independence,” he adds. Remember too, that a house is home, not an investment. “Don’t buy more home than you can afford, and don’t buy a home without a down payment,” says Kahler. Then too, adds David Bennett, spokesperson for the Washington Credit Union League, “Don’t treat your home like a bank account.”

            Lastly, says Canby, “If you control your finances, your finances won’t control you.”

 

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