Our economic climate over the last year has really changed…real estate values have tumbled in some instances 30 to 40 per cent, the stock market has taken a hard hit, basic life necessities like food and gasoline have increased in price beyond our wildest dreams, unemployment is at an all time high and credit is tight…times are tough.
In light of what is going on around us, it is important for you to analyze your own personal financial situation and determine the savings, spending and investment direction that makes the most sense for you. It’s a time to get selfish, determine what is important to you, and adjust your lifestyle accordingly because the days of “having it all” are pretty much over.
Over the last fifty years, the attraction of individuals towards developing an investment portfolio has really increased. When I was a child, my parents had their savings at a bank, collected interest and thought that “playing the stock market” was only for the very rich. They knew about economic depression, they lived it and, as a result, had little tolerance for financial risk.
As we watch the volatility of the financial markets around us and the recession/depression trends rearing their ugly head, it is time to get back to the basics and become more conservative in our approach to investing and make sure we are only risking those funds that we can afford to lose.
Believe it or not, there is a huge difference between saving and investing. Saving is for smaller , near term goals such as a family vacation, a new car or a financial emergency. It is where you keep cash in a savings account, money market or short-term certificate of deposit where you have little or no risk of losing principal and can have immediate access to your funds. As you look at your monthly budget of income and fixed expenses, savings comes from the excess …it is the part of your budget where you pay yourself…and until you accomplish this step, investing is totally out of the question.
Although this concept may appear to be pretty elementary, I am always surprised when clients call me, under tremendous financial stress, and they inform me that they are putting away the maximum contribution in their 401k plan at the office.
When money is tight it is very important to put first things first …living a comfortable, stress free life has to take priority. The good old basics of putting a roof over your head and bread on the table are the essentials that take the lead. Follow these with health care, modest transportation, and education.
Once all of the basics are covered, then look for savings opportunities…which, at that time, may include retirement savings if you are over the age of 40 and your employer offers a matching program. Be cautious of the investment products that are offered regarding built in fees and early withdrawal penalties…all of which are pretty common with insurance administered retirement plans.
Buyer beware! If you have any questions or doubts, contact your financial professional.