Spend less, save more is first step to financial recovery

By Kathy Kristof, Tribune Media Services

The first time I read Jane Bryant Quinn’s book Making the Most of Your Money (Simon & Schuster, 1997), it struck me as the personal-finance equivalent of The Joy of Cooking (Scribner, revised, 1997). Everything you ever wanted to know was somewhere in those pages. But with more than 1,000 pages, the thought of sitting down to read the book cover to cover was daunting.

I skipped and skimmed, using the index to find the topics I needed to know when I needed to know them. It was the top reference book on my shelf until two weeks ago, when Quinn sent me her updated version, Making the Most of Your Money Now (Simon & Schuster, revised, 2009).

Quinn, the renowned Newsweek columnist who has been writing on personal-finance topics for more than 30 years, focuses this rewrite on many of the top issues of today, such as recovering when you’ve been savaged by the economy. She talked with me about how Americans can deal with today’s tough market.

What is the most important thing for consumers to do now?

You need to get organized and see where you are economically. If you have been knocked back by the economy, you basically need to begin again, and you can’t get on top of your finances until you know what you have.

Create piles—credit card debt, other debt, cash savings, college savings and retirement investments. How much are you saving and how much are you spending? Where do you stand with your retirement savings and emergency savings?

That could be depressing. There are numbers indicating that people have built their 401(k) plans back up to where they were at the end of 2007, but it’s now 2010 and we’re three years closer to retirement. How should consumers deal with three lost years?

You are going to have to save more money. You can pretend that you don’t have to. But the reality is that your house and the stock market aren’t going to make you rich, so you’ll have to do it the old-fashioned way—by putting money away yourself.

The easiest way to save is by making it automatic. Have, say, 5 percent of your income taken out of your paycheck every month. Even if you are living paycheck to paycheck, you usually don’t miss that 5 percent. If that works, then raise it to 10 percent or even higher.

The thing is, if you lose your job when you are 55, that’s it. At that point, whatever you have managed to save is going to dictate your standard of living for the rest of your life. The people who have thought about it in advance and have done some preparation can make it work. If you haven’t done anything and you get to that point, you’ve blown it.

If someone has to choose between saving and paying off debt, what is best?

Financially speaking, you’d say to pay down your credit card debt because you’re likely to get a better return on that money. But I think that any interruption in the habit of saving is dangerous. You could pay off your consumer debt and then get into more debt because you are not in the habit of saving.

So if you are talking about paying down credit card debt and saving in your 401(k), I think you have to do those simultaneously. I think you should be splitting your money between those two.

What should people do if they have some money in retirement plans and savings? How should they invest it? Can the stock market be trusted with long-term money anymore?

People had this terrible thing happen to their investments at the end of 2008 and they reacted to it by putting their money in certificates of deposit, rather than stocks. But the people who did that missed out on the near-70 percent gain that started in March 2009. And they still aren’t in stocks.

You need bond funds as a safety net for when the stock market goes awry, but part of your 401(k) and other savings should be back in the market—permanently. I use the rule of thumb that you should subtract your age from 110. The result is the percentage of your assets that you should have in stocks. So, if you’re 50, that’s 60 percent.

What about individual stocks?

No. Don’t buy individual stocks. You and I are not analysts and we can never know with certainty what’s going on inside a company—how are the profit margins; is it using or developing the right technology; what’s the competition doing; and what are the problems they face and what is management doing about them. If you don’t know those things, you don’t have the basis for a decision to buy, hold or sell. And one bad pick can eliminate the benefit of years of patient savings.

Instead of individual stocks, buy stock mutual funds, especially index funds that follow the market as a whole. Tons of research shows that mutual fund managers don’t beat the market over time. You won’t either. But you’ll beat the fancy managers by investing in the entire market through index funds.

What about emerging markets— should people invest money there?

Yes. I am a big believer in the idea that the U.S. is going to grow slowly and Europe is going to grow slowly. But there are developing countries that are fiscally very sound—China, India, Brazil, Russia, Southeast Asia and other developing areas—and are going to grow rapidly. I’d recommend that you put more of the money you allocate to stocks into emerging-market mutual funds that invest in these countries. These funds can be very volatile, but I believe they are going to do better than investments in the U.S. and Europe.

What do you think about investing in gold?

I would not chase the price of gold, ever. As it goes higher and higher, it attracts more and more people. And this isn’t the first time that’s happened. Many people bought high in 1980, when it was at its peak. It is only now at its 1989 price, once you adjust for inflation. That’s a long time to hold an investment just to break even. You should not see gold as an inflation hedge. You shouldn’t think of it as something that you are going to trade in and make some money on it. I think of it purely as a disaster hedge.

If you think there is going to be some serious damage to the dollar, then you might want to hold 3 percent to 5 percent of your portfolio in exchange-traded funds that invest in gold. But only if you have a pretty big portfolio and can figure that you’re going to hold on to it through thick and thin. And, frankly, I think there are better ways to hedge against a decline in the dollar, like buying foreign bond funds.

Any closing advice?

Don’t look back. Don’t kick yourself. What happened happened. Now you need to figure what you are going to do about it. Your best strategy is now to spend less, save more and diversify. Forget remorse. The only thing to do is look forward.

Kathy M. Kristof’s column is syndicated by Tribune Media Services. She welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. E-mail her at kathykristof24@gmail.com.



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