THIS STORY HAS BEEN FORMATTED FOR EASY PRINTING

Getting to the other side

By Mitch Lipka
Globe Correspondent / November 16, 2008
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Plummeting investments. Rising mortgage payments. Huge debts. Stagnant wages.

The worst financial crisis since the Great Depression is squeezing Americans on all sides. As governments struggle to stabilize the world's financial markets, many families face the daunting task of managing household finances that have been rocked by the escalating economic turmoil.

Many Americans are wrestling with how to weather the economy at a time when the US housing market is slumping, banks are failing, the stock market is yo-yoing, and lenders are tightening credit standards. "For the vast number of Americans, we live paycheck to paycheck, and there is simply no give," said Sheila Mammen, an economics professor at the University of Massachusetts.

The situation seems grim, but there's hope. Financial planners and other money-management experts say there are ways for consumers to improve their financial plight even as they face uncertain times. The economic crisis presents new opportunities for Americans to become more disciplined with their finances, they say. "We need to have a new money ethic," Mammen said.

Here's the Globe's economic survival guide to help you create a budget that you can stick to; save and invest money wisely; figure out how to buy, sell, or hold onto a home during the slump; and clean up your credit.

CREATING A BUDGET

For some, creating a budget is as painful as getting teeth pulled. But keeping track of where and how you spend your money is integral to sound financial planning.

A budget should consist of allotments for savings, investments, necessities such as food and utilities, and discretionary money for things such as entertainment. To begin, experts suggest you look at all your spending over the past three months, leaving nothing out.

"You will not know where you are spending or what you are spending until you look at your spending over three months," said Mammen, the UMass professor.

Next, cut expenses. Often, entertainment expenses, such as going to the movies, can be cut or eliminated altogether. Save on heating costs by programming your thermostat. (For more information about cutting heating costs, go the US Department of Energy's website, hes.lbl.gov.) And scaling back on daily activities such as driving can reduce expenses like gas and maintenance.

But the biggest savings can be found in food expenses. Gary Foreman, who shares real budget-cutting tips on www.stretcher.com, said 20 percent of a household budget is spent on food and tends to be the one area with the most bloat and waste.

"Most of us make food decisions almost every day of the week," he said. "We have a great opportunity to adjust what we spend without significantly altering our lifestyle."

Cutting your food budget by just 20 percent can lower your overall household spending by 4 percent, Foreman said. Cutting $4 a day from your lunch budget can save about $1,000 a year. To see how reducing food expenses can add up, check under the "calculator" section at www.BankRate.com.

If you're having problems getting started, consider using software programs such as Microsoft Money and Quicken to help to track and analyze your spending. There also are a number of Web-based budgeting tools, including www.mint.com, www.kiplinger.com, and an Excel budget template at http://office.microsoft.com.

Of course, the most important thing about a budget is sticking to it. If you spend more than anticipated in one area, cut spending in another area to balance your budget.

SAVING

Savings can go out the window when families face challenges such as rising costs. But in bad economic times, it can be more important than ever to stash away cash.

Most planners say establishing an emergency fund - three to six months of income - is key. You can start by having a percentage of each paycheck directly deposited into a savings account. Set 10 percent as a goal - in addition to what is being put aside in retirement accounts. The money should be separate from checking and other accounts that are used to pay household expenses.

Even if you don't have a lot of money to save, small amounts add up. You can put loose change in a jar - the average American household has about $90 in change under sofa cushions, in dresser drawers, and other places, according to Coinstar Inc., which provides coin-counting machines to retailers. And if you reduce your household expenses, save the extra money.

Now that you have a strategy for saving, where do you put the money? Safety should be the first consideration.

"Don't get caught up into shopping for highest returns," said Jerry Miccolis, senior financial adviser with Brinton Eaton Wealth Advisors in Madison, N.J. "If the return is too good to be true, it probably is. You just want to pick the safest you can find."

Financial planners recommend a basic savings account. Make sure the bank is insured by the Federal Deposit Insurance Corp., which guarantees up to $250,000 per account.

Online FDIC-insured banks are another option. The returns at these banks, which include ING Direct, aren't huge - about 3 percent - but are more than most brick-and-mortar banks. Bank of America, for instance, is paying 0.20 percent on a basic savings account.

You can also put your savings into a money market account or buy a certificate of deposit. CDs require a minimum deposit, from $500 to $100,000, depending on the institution, and a time commitment from a month to five years. Rates tend to be considerably higher than savings accounts - some in the Boston area top 3 percent. In comparison, money market accounts at local banks are mostly offering interest rates between 1 and 2 percent.

You can check rates on Bankrate.com.

REAL ESTATE

If you're looking to buy or sell a home, it's a precarious time. Much like the stock market, no one can say where the bottom of the real estate market resides. That makes selling a challenge and buying risky.

Rick Miller, founder of Sensible Financial Planning in Cambridge, said potential buyers should plan to be in their homes for at least five years to make the cost of moving worthwhile.

"We don't know where prices are going," Miller said. "I've always discouraged people from thinking about housing as a speculative investment."

Home prices in many locations are falling, so there are opportunities for buyers. Median home prices in Massachusetts dropped below $300,000 in September for the first time since the spring of 2003.

But home buyers need to know the market could continue to fall, making refinancing difficult and selling a challenge. Buyers also want to avoid the mistakes made by millions of homeowners nationwide who bought homes they couldn't afford. Use a calculator from mortgage guarantor Ginnie Mae at www.ginniemae.gov to see whether buying makes more sense than renting.

Getting approved for a mortgage now almost always requires a down payment of at least 3 percent, and documented proof of income and assets. Miller advises buyers to choose a 30-year fixed-rate mortgage rather than an adjustable-rate mortgage unless they are planning to move before the rate resets.

If you are selling, be realistic about how much money you can get. The National Association of Realtors recommends having at least three real estate agents come to your home and give an opinion of the price, including analysis of comparable sales of homes on the market.

If you can wait to sell, consider renting your home. The uncertainty of the real estate market is creating added demand for rentals. Average monthly rents in the Boston area spiked 4.3 percent in the third quarter to $1,659 compared with a year earlier, according to a report from Reis Inc., a New York research firm that tracks rents for apartment buildings with at least 40 units.

For those struggling to avoid foreclosure, there are programs to help homeowners. Federal officials on Oct. 1 launched a program called Hope for Homeowners to help borrowers whose loans are worth more than their houses because of falling prices. The program aims to help distressed homeowners refinance into affordable 30-year, government-backed loans. Eleven Massachusetts banks have signed on to participate. Call your lender to learn more.

Other major financial institutions - including mortgage giants Fannie Mae and Freddie Mac, and lenders Bank of America/Countrywide, JPMorgan Chase & Co., and Citigroup - all recently said they would redo loans to help hundreds of thousands of troubled borrowers. The specifics of the plans vary, and several will begin in the next few months.

Bottom line: If you're falling behind on payments or worry that you might not be able to afford your mortgage, contact your lender or loan servicer to find out what options are available to you. Lenders have the ability to write down the size of a mortgage, reduce the interest rate, or extend payments.

Troubled borrowers can also call counseling services such as Homeowners HOPE Hotline, a free national counseling service, at 888-995-HOPE.

INVESTMENT STRATEGIES

It may be hard to stick to an investment strategy for the millions of Americans who are watching their portfolios plummet. The Dow Jones industrial average has lost roughly a third of its value this year. Stocks alone have lost more than $5 trillion in value in the past 13 months.

But when it comes to investing, the theme among financial planners is constant: Don't panic. They say stick to a long-term investment plan. For most people, that means buying a couple of diversified mutual funds instead of individual stocks, allowing fund managers to handle the market forces. It should also mean holding an appropriate mix of stocks, bonds, and cash given a person's age and investment goals.

"If you were fully invested a month ago in a strategy that made sense for you a month ago, by all means stick with it," said Miccolis, the New Jersey planner. "The last thing you want to do is sell into this market."

For those who plan to retire in more than 10 years, there's an opportunity to buy beaten-down stocks at relative lows. "A long-term investor can confidently buy about anything today and feel totally good because five years from now, the buy will appear to have been smart," said Jerry Mason, a veteran financial planner and professor.

When buying individual stocks, however, experts caution it's important to know the equity in depth. How are a company's earnings prospects, and how do they stack up against its competitors and the industry outlook? How solid is its management? Will its business be dragged down by the slowing economy? How did it perform during the last downturn, and what's changed in the interim? If you want to take the plunge, start by reading securities filings and financial websites such as finance.yahoo.com and www.marketwatch.com.

But most planners say that individuals rarely can do better than professional investors when picking stocks, and some of the industry's stars - like Fidelity's Peter Lynch - caution that individual investors should own hardly any individual stocks unless they are practically experts on the company and its competitors.

Also, some experts say that individuals shouldn't rush to buy stocks at their depressed values now. "It's not possible to assess whether stocks are a great buy or not," Miller said. "We won't know that for at least a year."

This may also be a good time for long-term investors to boost savings in retirement accounts. Ideally, you should contribute 10 to 15 percent of your salary. And if you get a raise, you can put half of it into your 401(k).

"Make sure if retirement is more than 10 years away, that all your money should be in equities and you should increase your contribution," Mason said.

Financial planners suggest a different strategy for those who have a shorter retirement time horizon - 10 years or less. While stocks have outperformed inflation historically, there's uncertainty that will happen in the short term. Those who need their money in the short term have a bigger problem, given the unknowns regarding the direction of the market and the duration of the declines.

Miccolis said shorter-term investors should make a realistic projection of their spending several decades into the future. "It may be that if you've seen a lot of your savings erode over the last two months, that you may have to give serious consideration to delaying retirement," he said.

Still, even if a person is older, he said they should remain invested at least in some stocks and resist the temptation to move everything to cash.

Another option gaining popularity with some planners are annuities, investments that guarantee regular cash payments in retirement. These could be appropriate in particular for workers who don't expect a regular corporate pension, said Dolores Kong, a certified financial planner at Winslow, Evans and Crocker, a financial services firm in Boston. But many annuities aren't indexed to inflation, she said, which makes them less attractive to some investors.

CREDIT CLEANUP

Lenders recently have tightened credit standards, making it more difficult to get everything from student and auto loans to mortgages.

The more blemishes on a credit report, the worse the rating and the harder it is to get credit and favorable terms. A score below 620 will categorize you as high risk and make it harder to get credit.

If you've had late payments, a bankruptcy, or a foreclosure, it can be devastating to a credit report. They can be remedied over time with a good subsequent record. But that could take a decade.

To begin repairing damaged credit, Mason suggests getting the once-a-year free credit report from each of the three reporting agencies - available at www.annualcreditreport.com.

First, make sure there are no errors and if there are, ask for them to be fixed. For more information on how to find and correct errors, go to the Federal Trade Commission site at www.ftc.gov. Secondly, experts say pare down outstanding lines of credit to no more than five or six.

Additionally, lower the ratio of debt to available credit. Ideally, you should have less than 30 percent debt to credit - or $3,000 owed on $10,000 of credit.

If you can't make your minimum monthly payments, reach out to such nonprofit organizations as Consumer Credit Counseling Service, which can help establish a payment plan acceptable to you and your lenders. But avoid so-called credit repair companies. The FTC urges consumers to be cautious with firms that offer to negotiate down your debt.

Read a publication from the FTC on these services under the "consumer protection" tab on www.ftc.gov.

Consolidating your debt can help. Putting most or all of your debt with a single lender at a lower interest rate can take off some pressure, but it also means you'll have a large payment to make.

You can also contact creditors to work out more affordable payment plans.

But contact them sooner rather than later: Once your account has gone into collection, it's usually too late to work out a deal.

Globe staffers Ross Kerber and Jenifer McKim contributed to this report.

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